Spotify (SPOT) surged on the heels of its Q2 earnings report with shares climbing more than 13% on Wednesday after the company reported a beat on both revenue and monthly active users.

But one analyst says the stock surge was an “overreaction” given the platform’s profitability struggles.

“While we believe there remains material user growth left for Spotify we highlight that many investors question whether Spotify will ever be able to generate significant lasting profitability,” Pivotal Research analyst Jeffrey Wlodarczak said in a new note.

The analyst added that the “concentrated power of the music labels & competition not necessarily focused on generating profitability” underscores that sentiment, explaining that, although he sees Spotify hitting its gross margin targets (30% to 35%) in the long term, the market is focused on short-term profitability as recession fears loom.

Wlodarczak reiterated his Hold rating on the stock, and lowered his price target from $110 a share to $105.

In addition to reporting a wider-than-expected loss in the second quarter, Spotify’s reported gross margins disappointed at 24.6%, missing estimates of 25.2% as the streamer spends big on non-music content.

Spotify has “been a public company for a while, and they’ve really never been profitable,” CFRA analyst John Freeman previously told Yahoo Finance.

He signaled that the platform’s sky-high costs for its podcast deals (which included a reported $200 million multi-year licensing contract with Joe Rogan) can only go so far.

“The problem with paying Joe Rogan, or whoever, a lot of money is that you lose leverage on a certain percentage of your subscriber base and it then becomes the ‘Joe Rogan Show,'” the analyst explained.

He added, “I have no problem with them sacrificing growth — if they can show some profitability.”

Freeman downgraded Spotify to a “Buy” from a “Strong Buy,” while also lowering his 12-month price target from $156 to $139 a share, citing the company’s “profitability roller coaster.”

Investors seem to have similar concerns with shares tumbling by more than 50% so far in 2022 and by about 70% since reaching an all-time high in February 2021.

Spotify reportedly signed a $200 million multi-year licensing contract with Joe Rogan.

Spotify reportedly signed a $200 million multi-year licensing contract with Joe Rogan.

Spotify attempted to revive sentiment during its most recent investor day, revealing that it brought in roughly $215 million in podcast revenue last year.

CEO Daniel Ek underscored the potential of the platform’s podcast unit, estimating that he expects it to generate margins between 40% to 50%.

Executives continue to preach the long game to investors, even amid difficult macroeconomic conditions.

Ek doubled down on the earnings call that the company has long-term pricing power, revealing that there’s been “no material impact” on users amid the downturn.

Still, the company is “preparing as if things can get worse,” and plans to slow hiring by about 25% for the back half of 2022.

Shares have since leveled out since Wednesday’s spike, down about 1% in afternoon trading on Thursday.

Alexandra is a Senior Entertainment and Food Reporter at Yahoo Finance. Follow her on Twitter @alliecanal8193 and email her at [email protected]

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