Spotify (SPOT) stock dropped over 8% in premarket trading after the company provided disappointing user guidance for Q2. The music streaming giant expects 689 million monthly active users (MAUs) for the second quarter, falling short of the 694 million that analysts had anticipated.
In Q1, Spotify saw a 10% year-over-year increase in MAUs, reaching 678 million. However, this figure slightly missed the 679 million estimate. Premium subscribers grew by 12%, totaling 268 million. This marked the second-highest Q1 subscriber net additions in Spotify’s history.
Spotify’s CEO, Daniel Ek, remained optimistic despite the lower-than-expected numbers. In a statement, he highlighted that the company’s engagement remains high, retention is strong, and the freemium model allows users flexibility. Ek added that while short-term fluctuations might occur, the company’s long-term outlook is clear.
Before the results, analysts described Spotify as a defensive play in today’s uncertain macroeconomic environment. Similar to Netflix, analysts noted Spotify’s subscription model could offer more stability amid volatility.
Spotify’s stock had soared to record highs of around $652 in February. Though it has fallen since, the stock has still risen approximately 106% over the past year. This growth comes after a challenging 2022 when the company faced significant lows.
In February, Spotify achieved its first full year of profitability, reporting record highs in revenue, gross margin, operating income, and free cash flow. The company has undergone a major overhaul, which includes layoffs, C-suite shakeups, and changes in its podcast strategy. After investing $1 billion in podcasts from 2019 to 2021, Spotify scaled back its efforts but remains committed to the medium. In Q1 2024, Spotify paid over $100 million to podcast publishers and creators, including high-profile names like Joe Rogan.
At the company’s 2022 Investor Day, Spotify’s Q2 guidance disappoints as the company set ambitious targets, including long-term gross margins of 30-35%. At that time, its gross margin was around 25%. In 2024, Spotify raised prices twice in less than a year and introduced a higher-priced audio bundle that includes music, podcasts, and audiobooks. The company also launched an audiobooks-only plan and a music-only streaming tier, aiming to attract a wider audience.
Spotify reported Q1 margins of 31.6%, slightly higher than estimates but down from the record 32.2% in Q4. Analysts warn that the pace of margin expansion might slow after a sharp rise in 2024. Additionally, Spotify’s renewed agreements with major music labels may affect future margins.
Looking ahead, advertising revenue will be closely monitored. Currently, advertising accounts for about 12% of Spotify’s total revenue. Analysts have pointed out that the weak macro environment could impact future advertising growth, with some companies noting weaker ad budgets.
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