Spotify (NYSE:SPOT) shares were raised to Buy from Neutral at Rosenblatt Securities on Monday, with the firm also doubling its price target for the stock to $300 from $250 per share.
Analysts at the investment firm headlined their research note with the statement that Spotify's margin reset "looks real, and powerful."
"Spotify's large-scale restructuring last week -- shedding 17% of headcount, and its CFO, could be seen as scary, or promising," said Rosenblatt. "The scary scenario is that the cuts foretell a surprising slowdown in sales growth currently guided to be up close to 20% ex currency in 4Q23, with subscriber growth for 2023E in the 30 million range."
"The promising scenario is that sales and subs remain strong, and cost controls will cause margins to explode. After probing, analysts favor explosion," they added.
The firm expects Spotify's margin growth to continue past 2024. They also argue that SPOT's operating profit could surge to over €1 billion in 2024, well above published estimates.
"If Spotify hits its guidance for ~20% constant currency revenue growth in 4Q23 (analysts believe it will), then it should be able to sustain that for at least three quarters until comped in 4Q24," analysts at Rosenblatt explained. "Spotify sees gross margin expansion in 2024 (for which this restructuring boosts confidence). This means gross profit growth in 2024 should exceed revenue growth and can top 20%."
"The setup seems to be for high teens revenue growth to continue after 2024 and profit growth to be faster because of margin expansion. Spotify's recent ability to raise global rates 9% while sub growth accelerates back to peak levels, and ad growth picks up, suggests the best assumption is for revenue growth to continue after 2024 at a mid to high teens plus pace," said the Wall Street firm.