On Tuesday, Canaccord Genuity (TSX:CF) adjusted its stock price target for Spotify Technology SA (NYSE:SPOT), increasing it to $400 from the previous target of $370, while maintaining a Buy rating on the shares. The decision followed the announcement of Spotify's second quarter results, which displayed strong performance, particularly in terms of gross margins and profitability.
The company reported that its Premium subscribers and total revenue met market expectations. Moreover, Spotify achieved a significant 10% year-over-year increase in Premium Average Revenue Per User (ARPU), attributed to recent price hikes. Notably, the company experienced lower churn rates than anticipated following the price increases.
Still, Spotify did face some challenges during the quarter. Monthly Active Users (MAUs) for its ad-supported service and advertising revenue did not perform as well as expected. The company attributed the slower growth in developing markets as a reason for the lag in ad-supported MAUs, along with volatility in upper-funnel marketer spending affecting advertising revenue.
In response to the underperformance in ad-supported user growth, Spotify is revising its marketing strategies and considering potential product improvements aimed at boosting user engagement and retention. These adjustments are expected to contribute to better MAU net additions in the latter half of the year.
For the third quarter, the company's guidance on MAUs was below consensus. However, the forecasts for other key metrics, including Premium subscribers and total revenue, were aligned with expectations. Gross margins and profitability projections exceeded consensus, with gross margins anticipated to surpass the 30% threshold for the first time in Spotify's history.
Investor sentiment towards Spotify has been positive, with the company's stock rallying on the back of the earnings report. The progress in gross margin expansion and the momentum in the Premium business have reinforced the company's appeal, leading Canaccord Genuity to reiterate its recommendation of Spotify as a core investment for large-cap tech investors.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.