Is 110x earnings too much to pay for Spotify stock? A lot of investors think so today.
Shares of Spotify Technology (SPOT -11.51%), the European streaming music and podcasts giant, closed down 11.5% on Tuesday after reporting a surprise Q2 loss.
Heading into the report, analysts predicted Spotify would earn 2.02 euros per share in profit for the quarter. Instead, Spotify reported a 0.42 euro ($0.48) loss. This was the fourth quarter in a row that Spotify’s profits didn’t measure up to expectations — but the first time in 18 months the company actually lost money.
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Spotify Q2 earnings
Not all Spotify’s news was bad. Monthly active users grew 11% year over year, with premium subscribers up 12%.
Operating profits soared 53% to 406 million euros ($468.9 million), and free cash flow hit 700 million euros ($808.4 million).
And yet, Spotify appears to have broken the cardinal rule in investor relations last quarter: If you’re going to make a promise, deliver on it.
While presenting objectively fantastic numbers indicating tremendous growth, Spotify’s Q2 results fell short of its own forecasts for Q2 sales (Spotify had promised 4.3 billion euros, but delivered only 4.2 billion), and for operating income as well. Spotify said it would earn 539 million euros. Its actual operating profit was 25% less.
Time to sell Spotify stock?
The good news: Spotify’s not making that mistake again. Turning to guidance, Spotify promised only flat sales of 4.2 billion euros again in Q3 — no growth at all. Operating profits might be 485 million euros, more than in Q2, but less than Spotify promised for Q2.
Personally, I like the underpromise, overdeliver strategy better than the alternative. Still, convincing investors to pay 110 times earnings for a company that just promised zero sales growth is going to be tough. Between the surprise loss and the weak guidance, this is why Spotify stock crashed today.
Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Spotify Technology. The Motley Fool has a disclosure policy.
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