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