Spotify added millions of users. Here’s why the stock is getting hammered

Spotify’s subscriber numbers are surging. But its share price is not.

Spotify’s stock on Tuesday plummeted 14% to close at $140.38 a share as the company issued weaker revenue guidance than Wall Street analysts expected.

The Swedish audio company added 10 million subscribers during the second quarter to hit a total of 220 million paying users, up 17% from a year earlier. Monthly active users — which includes subscribers and people who use the free ad-supported version — reached 551 million, up 27%. That was the highest quarterly user growth in its history.

Revenue was $3.5 billion, up 11%, in the second quarter.

Still, the quarter was not profitable. Spotify reported a net loss of about $333 million compared with $138 million a year earlier. Some of the net loss was caused by charges related to restructuring efforts.

“In my opinion, the stock should be doing better than expected, given their results,” said Ray Wang, principal analyst at research and advisory firm Constellation Research. “They have shown they can grow … but the market isn’t sure that buyers will pay for the premium subscription offering.”

Investors reacted negatively to Spotify’s outlook. The company said in the third quarter it expects sales to be $3.6 billion. Analysts had expected the company to project $3.78 billion, according to FactSet.

Daniel Ives, a managing director of equity research at Wedbush Securities, said he thought it was wise for Spotify to issue that guidance in a choppy macroeconomic environment and as the company imposes price hikes. Spotify on Monday announced plans to raise prices in more than 50 countries. In the U.S., Spotify’s monthly individual premium plan will go up $1 to $10.99 a month.

“The company is going through a major transformation with the price increases on the way, which we view as a smart poker move despite some near-term potential churn,” Ives said.

Spotify, once known solely as a music streaming company, has expanded its offerings in recent years to include podcasts and audio books. But like other tech companies, Spotify has focused on reducing its expenses, including laying off hundreds of workers amid a challenging economic time.

The company has also restructured its podcasting division and opted not to renew expensive talent deals with some podcast partners, including Meghan Markle and Prince Harry’s audio company, Archewell Audio.

Daniel Ek, Spotify’s chief executive, called the earnings results “a very strong quarter.”

“We beat our own expectations again, across both [monthly active users] and subs,” Ek said in an earnings call Tuesday. “In addition, it’s really gratifying to see the outperformance and growth that continues to come from markets all over the world.”

Ek admitted that the company “probably got a little ahead of ourselves” with some of its investments.

He added that the company has a lot more data regarding podcasts and is “doubling down and renewing the things that did work and stop doing the things that didn’t work.”

Netflix, which released its earnings last week, also saw a dip in its stock price after its third-quarter guidance did not match some analysts’ expectations. Netflix added 5.9 million subscribers during the quarter.