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Spotify beats forecasts, but why has the stock price been performing so poorly?

Spotify stock (SPOT) beat expectations but stock price remains under pressure.

Spotify (NYSE: SPOT) has beaten revenue expectations after announcing impressive financial results for its second quarter.

The streaming giant said premium subscribers jumped 20% compared to the same period in 2020, hitting a mighty 165m new signups in its latest quarter. Monthly active users grew 22% to 365m, but fell short of expectations due to the ongoing impact of the Covid-19 pandemic.

Despite pandemic worries, the streamer’s revenue grew 23% to €2.3bn over the quarter.

This was also ahead of forecasts thanks to better-than-expected subscription growth and a rebound in advertising.

Chief executive officer Daniel Ek expressed his satisfaction with the quarterly performance, saying: “The second quarter was a strong quarter for Spotify overall, with the majority of our major metrics performing better than expected.

“While monthly active user growth was softer than expected in the first half of the year, we are seeing that trendline reverse and all the leading indicators show that we are back on track. By accelerating our pace of innovation and investing for the long term, we continue to cement our standing as the preferred audio platform around the world.”

Why is the Spotify stock performing so badly despite the company beating expectations?

Spotify’s stock wasn’t such a big hit after the company’s fiscal data was released. The stock price is currently trading at $220, down 7% on the day and is down 17% this year.

Spotify’s ad-supported service is a low-profit operation. The company walks a thin line between running enough ads to turn a profit and limiting the advertising time to keep free users active. As a result, music royalties generally consume nearly all of the company’s incoming ad revenue.

Premium services don’t have that problem. Spotify saw a 28% gross margin for premium subscribers in Q1, supported by price increases.

Growth trends are moving in the opposite direction. Premium revenue rose 14% year on year, while the less lucrative ad-supported sales jumped 46% higher. Hence, Spotify’s profit margin is shrinking long term, which is a concern for investors.

Not Investment Advice Indie Investor is for general information use only. It must not be relied upon by readers when making (or not making) their investment decisions. If in doubt you should seek advice from a professional financial adviser.

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