Spotify’s share price dropped as much as 9% on Wednesday (Feb. 3) following the company’s earnings release for the fourth quarter of 2020. By the end of the day, Spotify traded at $317.56, down 7.97% from Tuesday’s closing price, and lost $5.27 billion of market capitalization.
Investors didn’t drive the price down because of Spotify’s 2020 financial performance. In fact, Spotify dealt with the pandemic well and likely benefited from consumers’ broader shift to streaming media, mainly on-demand video services such as Netflix and Disney+. Revenue hit $9.48 billion and subscriptions increased by an impressive 11 million — the most in four quarters — to 155 million, hitting forecasts for revenue and subscriber growth in the fourth quarter. That average revenue per user was down $0.19 from the prior year matters less when Spotify is opening in new markets and adding subscriptions — many of them family plans — at a good clip.
Instead, Spotify share price fell because its guidance on 2021 revenue and subscribers was lower than analysts expected. After closing 2020 with 345 million monthly active users, Spotify forecasts that number will grow to between 407 million and 427 million by the end of 2021 with $10.8 billion to $11.3 billion in revenue — up 14% to 19% from 2020.
For example, J.P. Morgan’s Dough Anmuth had forecast 161 million subscribers in 2021; Spotify’s guidance was 155 million to 158 million. That difference of 3 million to 6 million subscribers between forecasts and expectations equates to $184 million to $368 million in annual revenue.
It is common for a company’s stock price to sink after releasing strong financial results but failing to meet expectations for the future. Even if Spotify’s quarterly earnings show growth during the pandemic, estimates on future earnings determine how investors value a company and price its stock.
Of course, Spotify’s share price will swing as its outlook changes. CEO Daniel Ek emphasized during Wednesday’s earning call that 2021 is hard to gauge. Even though 2021 “will bring more uncertainty than any other year,” Ek remains optimistic because Spotify “exceed[ed] almost all expectations in 2020,” he added, “and I believe we can do the same in 2021.”
