Spotify tops subscriber forecasts, sees margin pressure this quarter

Spotify Technology SA, a leader in music streaming, tumbled after saying profit margins may narrow due to programming costs.

The shares fell as much as 9.5% on Wednesday, the biggest intraday decline since May 9. The stock has lost more than 60% this year.

The sell-off shows how investors have become less interested in the pace of subscriber growth and more focused on whether Spotify becomes profitable.

That has put pressure on management to make a strong case for investments in newer businesses like original podcast programming.

“Sentiment on the name remains among the lowest in our coverage, and this quarter is not likely to change that,” Raymond James analyst Andrew Marok said in a note to clients. “We envision a longer-than-expected road to margin expansion.”

On a conference call with investors Tuesday, Chief Executive Officer Daniel Ek said he was mulling a price increase for its streaming product in the U.S., but wanted to first discuss the move with the record labels that provide the company’s music.

Apple Inc., a rival in music streaming, raised the price of its service this week by $1 to $10.99 a month for individuals, citing costs. Spotify, based in Stockholm, charges $10.

Spotify’s third-quarter ad revenue increased 19%, but the company said sales were slower than expected due to a “challenging macro environment.”

The company joins other tech giants, including Alphabet Inc. and Snap Inc., in reporting slower ad sales.

On the call, Ek said he wasn’t worried about ad sales slowing because the business is still a small one for Spotify.

Spotify’s gross margin in the quarter failed to meet the average 25.2% estimate of analysts, coming in at 24.7%, which Spotify attributed to the ad slowdown and increased content spending – like its recent move into audiobooks.

The company forecast a gross margin of 24.5% in the fourth quarter, and an operating loss of 300 million euros, both below consensus expectations.

The company has been taking steps to diversify its revenue.

Spotify began selling audiobooks in September in an effort to enter the “substantially untapped” market, according to Nir Zicherman, global head of audiobooks and gated content.

Spotify continues to wrestle with its podcasting business, terminating employees at its Gimlet Media and Parcast studios this month, following layoffs of other podcast staff in September.

The company reported 456 million monthly average users for the third quarter, beating analysts’ projections of 450.7 million.

It surpassed paid subscriber predictions as well, confirming some investors’ beliefs that the business can weather a shaky economy and inflationary environment.

Third-quarter revenue reached $3.03 billion, exceeding analysts’ expectations.

Paid subscribers totaled 195 million, beating Wall Street projections of 194.2 million.