THE MARKET DIDN’T LIKE what they heard from Spotify Technology (ticker: SPOT) on Thursday, sending the stock down more than 8 percent. The music streaming leader reported lackluster guidance, but analysts say growth in advertising, the launch of new products and further penetration of the massive global smartphone market make SPOT stock a long-term buy.
Spotify reported adjusted third-quarter earnings per share of 0.23 euros (26 cents), well above consensus expectations of a 27-cent loss. Revenue of 1.35 billion euros ($1.54 billion) slightly topped consensus estimates of $1.51 billion euros. Revenue was up 31 percent compared to a year ago.
Gross margin of 25.3 percent was up from 22.3 percent in the third quarter of 2017 and beat consensus estimates of 24.9 percent.
Spotify reported 87 million monthly subscribers, up from 83 million in the second quarter and in-line with analyst expectations. Monthly subscribers account for about 90 percent of Spotify’s total revenue.
Spotify’s total users, which includes its base of ad-supported free users, was 191 million, in-line with previous guidance and up from 180 million in the second quarter.
However, despite the top- and bottom-line beats, SPOT stock sold off on concerns about weaker-than-expected guidance. Spotify said it expects full-year monthly active listeners of between 199 million and 206 million users, slightly below the 208 million users Wall Street was expecting. In addition, Spotify said it expects fourth-quarter revenue of between $1.54 billion and $1.77 billion, slightly below consensus analyst expectations.
Spotify stock is up 2.6 percent from its initial public offering price in April, but some analysts say the post-earnings dip is a buying opportunity for long-term investors willing to stomach Spotify’s growing pains.
Bank of America analyst Jessica Reif says premium revenue growth of 31 percent far exceeded her forecast of 23 percent growth.
“SPOT delivered better 3Q18 results, reflecting in-line premium subscriber gains, stronger average revenue per user and slightly lower than expected ad-supported monthly active users,” Reif says. “We believe substantial headroom exists for continued SPOT gross margin growth and equity value creation.”
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