Spotify share price slumps over misinformation concerns ahead of earnings

Despite the Spotify [SPOT] share price reaching a 52-week low at the end of January, the music streaming platform has positive consensus forecasts for its upcoming fourth-quarter (Q4) earnings announcement.

Analysts polled by Zacks Investment Research expect the company to report a 44.3% year-over-year rise in earnings. They are also targeting an 18.8% hike in revenues from the year-ago period when the firm releases its financial results on 2 February.

Analysts are bullish on the Spotify share price ahead of its earnings release, with many expecting music streaming services, particularly podcasts, to see rising demand amid restrictions to curb the spread of the omicron variant.

The company is also expected to have benefitted from a rise in advertising revenue, helped by an increase in marketing budgets and a surge in podcast investments. For example, Spotify’s acquisition of digital audiobook platform Findaway in November 2021 was part of efforts to develop its audiobook infrastructure.

What spooked the Spotify share price? 

The Spotify share price has plunged 37.7% over the past 12 months. Driving down investor sentiment was increased competition from the likes of Amazon [AMZN] and Apple [AAPL] Music, as well as more recent concerns that it is a stay-at-home stock and will be hurt by the lifting of pandemic restrictions.

Another potential headache for the Spotify stock price is the controversy surrounding podcaster Joe Rogan, who has been accused of spreading misinformation about Covid-19 vaccines. As a result, veteran singer-songwriters Neil Young and Joni Mitchell have asked for their songs to be removed from the platform. Although the company has since published new platform rules and announced that it would add content advisory warnings to podcasts that discuss Covid-19, it could be incredibly damaging to the Spotify stock price if other artists follow suit.

Indeed, the Spotify stock price fell 11.5% in the days following the news that Neil Young had issued an ultimatum to the streaming platform last week, closing at a 12-month low of $171.32 on 27 January.

In comparison, Apple [AAPL] has seen its share price climb 33.3% over the past 12 months, while Amazon [AMZN] is down 6.7% year-over-year. Meanwhile, the Ark Next Generation Internet ETF [ARKW], which has a 5% weighting in Spotify shares, has dropped 38.6% over the past 12 months.

Monthly active users show a strong growth trend in Q3

In Q3, Spotify reported a 27% rise in revenues to €2.5bn, beating expectations by €50m. The growth in revenues was helped by a 19% year-over-year rise in total monthly active users to 381 million, while premium subscribers also climbed 19% to 172 million. However, its earnings per share came in at a loss of €0.41, missing expectations by €0.29.

Spotify talked up demand around the world after the release of Q3 results, citing South Korea and Pakistan as particular success areas. The company also highlighted efforts to personalise the user experience by allowing two users to merge their music into one shared playlist.

Daniel Ek (pictured), CEO of Spotify, said that the company’s plan to expand its services globally saw the streaming service become the number one podcast platform in the US during the earnings call. He also pointed out that Spotify had 3.2 million podcasts on the platform as of October 2021, representing a growth rate of more than 1,500%. 

Despite missing expectations on its earnings, the Spotify stock price rose 10% after the announcement on 27 October.

Future growth will depend on subscriber numbers and ad revenue

Investors will be keeping a keen eye on monthly active user growth and premium subscription numbers when it reports to see whether the relaxing of pandemic restrictions have affected listener trends.

There has also been discussion following the decision by Netflix [NFLX] — another stay-at-home stock winner — to raise subscription prices and whether this will be mirrored by other providers such as Spotify.

Looking ahead, 25 analysts offering 12-month price forecasts for the Spotify stock have a median target of $296.09, with a high estimate of $373.24 and a low of $156.19. The consensus rating among the analysts is to ‘buy’ the stock.

Monness Crespi has a $240 price target on the stock, down from $380, with analyst Brian White stating that Spotify is “riding a favourable secular trend” and tapping into a large digital ad market, according to The Fly. However, the analyst notes that Spotify also faces a “tech tantrum” given fears of interest rate hikes and Netflix’s subscriber miss, which “has cast a cloud of suspicion over the Spotify story”.