On Monday, Benchmark analyst adjusted the price target for Spotify Technology S.A. (NYSE:SPOT), increasing it to $440 from the previous $430 while maintaining a Buy rating on the stock. The adjustment comes ahead of Spotify's third-quarter earnings report scheduled for Tuesday, November 12, after market close.
The revised price target reflects an anticipated increase in Premium revenue following a pricing adjustment in Canada, which is expected to contribute approximately an additional €10 million in the fourth quarter of 2024 and €121 million in 2025. The analyst noted that the potential gross margin benefits from the price increase are likely to be offset by investments in promoting audiobook engagement on the platform.
In light of a shift toward emerging markets, the analyst has conservatively adjusted the Average Revenue Per User (ARPU) estimates downwards by 1% for the fourth quarter of 2024 and 2% for 2025. This conservative stance accounts for the dilutive effect on ARPU as the mix of new premium subscribers shifts to regions with lower pricing, coupled with uncertainty around the conversion rates of premium subscribers in these emerging markets.
Additionally, the analyst has revised the third-quarter operating profit (GAAP) estimate to €380 million, factoring in additional social charges associated with the recent appreciation in Spotify's share price.
Despite a gross margin on ad-supported content that is 50 basis points above consensus for 2025, reflecting leverage on stable year-over-year podcast content costs, the forecast for premium gross margin in the fourth quarter of 2024 and 2025 is 40 and 30 basis points below the consensus, respectively.
However, this is counterbalanced by stronger operational leverage, which supports the analyst's operating profit (GAAP) forecast for 2025, which is 9% above consensus.
The Benchmark analyst reiterated the Buy rating and justified the raised Discounted Cash Flow (DCF)-based price target of $440, reflecting confidence in the company's revenue growth and operational efficiency.
The upcoming earnings report and the outcome of Copyright Royalty Board (CRB) litigation related to mechanical royalties and post-bundling leverage are also anticipated to provide further insight into Spotify's financial trajectory.
In other recent news, Spotify Technology S.A. has been the subject of several analyst notes. Evercore ISI maintained its Outperform rating for Spotify, predicting third-quarter earnings results that modestly exceed expectations, with a revenue forecast of €4.02 billion.
Similarly, Deutsche Bank (ETR:DBKGn) maintained a Buy rating on Spotify shares, raising its price target to $440 from $430, citing the company's upcoming third-quarter earnings report. Rosenblatt Securities adjusted its stock price target for Spotify to $438, maintaining a "Buy" rating, and KeyBanc Capital Markets increased their price target for Spotify, citing consistent annual revenue increases and robust operating margins.
In recent developments, Spotify Technology and Paramount Global (NASDAQ:PARA) have adopted Alphabet (NASDAQ:GOOGL) Inc's Google Cloud's newly developed Axion CPU to enhance their streaming services. This marks Google Cloud's entry into the competitive market of Arm-based technology.
On the other hand, Believe, a French digital music company, is currently embroiled in a $500M U.S. copyright case with Universal Music Group (AS:UMG). UMG accuses Believe of distributing unauthorized copies of copyrighted recordings, leading to a lawsuit that could significantly impact the company's financial standing.
These are among the recent developments shaping the landscape for investors.
InvestingPro Insights
Spotify's financial performance and market position align with the analyst's optimistic outlook. According to InvestingPro data, Spotify's revenue growth remains strong, with a 19.83% increase in the most recent quarter. This robust growth supports the analyst's expectations of increased Premium revenue following pricing adjustments.
InvestingPro Tips highlight that Spotify's net income is expected to grow this year, and analysts predict the company will be profitable. This aligns with the analyst's revised operating profit estimates and expectations of stronger operational leverage.
The company's stock has shown impressive performance, with a 134.34% price return over the past year and is currently trading near its 52-week high. This strong market performance reflects investor confidence in Spotify's growth strategy and potential for future profitability.
For readers seeking a more comprehensive analysis, InvestingPro offers 18 additional tips for Spotify, providing deeper insights into the company's financial health and market position.
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