Spotify Tumbles as Investors Adjust Tune on Margin Concerns

(Bloomberg) -- Spotify Technology SA is planning to boost spending in an effort to drive the next phase of growth, but Wall Street isn’t singing along to the tune.

The Stockholm-based music streaming service tumbled the most in almost six months after management cautioned that margins were likely to be compressed by increased spending on research and development, as well as content. The company also reiterated a fourth-quarter revenue forecast that fell short of estimates and cut the high end of its projections for growth in monthly active users and premium subscribers in the quarter.

Coupled with recent tensions with record labels, Spotify has limited runway for error as competitors like Apple Music and Pandora Media Inc. hope to close in on its dominance. Streaming services dish out a chunk of their sales to record labels for rights to distribute songs and music videos -- a business relationship that strains the ability to turn a profit.

Shares of Spotify fell as much as 11 percent in New York, their biggest intraday decline since May 3. The stock had already fallen 17 percent in October amid a global tech rout.

While Spotify’s third-quarter results were largely in-line with estimates, Buckingham Research Group analyst Matthew Harrigan said he’s “looking for new growth initiatives.”

Spotify management hopes that partnerships, like its recent agreement with Alphabet Inc.’s Google to offer a free Home Mini product, are a step in the right direction to adding new subscribers even if they come at the cost of some margin erosion. The company cut its forecast for fourth-quarter gross margin by 50 basis points due to the Google Home partnership.

To contact the reporters on this story: Kamaron Leach in New York at kleach6@bloomberg.net;John J. Edwards III in Geneva at jedwardsiii1@bloomberg.net

To contact the editor responsible for this story: Catherine Larkin at clarkin4@bloomberg.net

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