Spotify shares drop on slower-than-expected user growth

Spotify Technology SA’s lighter-than-expected number of new paid subscribers drove shares as much as 5% lower in trading before the bell, overshadowing revenue, gross margins and user engagement successes in the second quarter.

The reaction to what appeared to be one slight disappointment in an otherwise rosy quarter underscored just how dependent on growth companies like Spotify and Netflix are in preserving market value.

The world’s most popular paid music streaming service said premium subscribers rose 30% from a year earlier to 108 million, but missed analysts’ expectation of 108.5 million.

“We missed on subs. That’s on us,” Spotify chief executive officer Daniel Ek said, referring to subscribers in a shareholders note Wednesday. He said the company expected to “make up lost ground before year-end.”

“The issue is that they missed on paid subs, which is probably the most important number for the company,” said analyst James Cordwell of Atlantic Equities.

Revenue from premium subscribers, which accounted for nearly 90 percent of its overall revenue, rose to $1.7 billion in the second quarter.

Since launching its service more than a decade ago, Spotify has overcome resistance from big record labels and some major music artists to transform how people listen to music and become a global leader in music streaming.

To fuel its next stage of growth, Spotify launched its service in South Africa, the Middle East and India in recent months even as it continues to price aggressively in the developed world.

It still faces competition from Apple, which trails Spotify with more than 60 million subscribers as of June.

On a morning conference call with analysts, Ek said Spotify delivered 31 percent year-over-year subscriber growth, “which we believe is roughly twice the rate of growth of our next closest competitor.”

Spotify’s monthly active users, which included its ad-supported free version, grew 29 percent to 232 million and beat expectation of 227.7 million users.

It now expects between 240 million and 245 million monthly active users in the third quarter. Analysts were expecting to end the current quarter with 242 million users.

Shares of the Stockholm-based Spotify were trading down 3.6 percent Wednesday morning, at $149.55.