Goldman Sachs upgraded Spotify (NYSE:SPOT) from Neutral to Buy, raising the 12-month price target from $320 to $425 in a note to clients Wednesday.
This decision follows Spotify's Q2 2024 earnings report, which the bank said demonstrated strong operating margin and free cash flow momentum anticipated to continue into the second half of 2024 and into 2025.
Goldman Sachs highlighted several key themes driving their upgrade:
Market Leadership: "Spotify is the clear global audio platform leader," which Goldman expects will result in "scaled compounded user growth, rising engagement across multiple format structures, and pricing power."
Operational Efficiency: Following a late 2023 operating cost restructuring, the investment bank says Spotify is showing significant improvements in gross and operating margins. Goldman believes this trend will continue, potentially outperforming even their raised forecasts. They noted, "We can see a scenario that even our newly raised forecasts might still be too conservative."
Free Cash Flow and Capital Returns: Spotify has generated trailing 12 months free cash flow of approximately €1.3 billion. With no immediate need for this cash, Goldman predicts Spotify could introduce a capital return story within 12-18 months, potentially repurchasing up to 25% of its current market cap over the next six years.
Goldman Sachs notes that Spotify's Q2 '24 earnings exceeded premium subscriber additions, aligned with revenue expectations, and surpassed gross margin guidance by approximately 110 basis points. This solid performance led to a 12.5% rise in shares.
Goldman noted, "We don't see a reason why such operating velocity would stall or reverse through year-end 2024."
Potential headwinds include the competitive media landscape and macroeconomic factors. However, Goldman remains confident, stating, "We see the eventual scaling of SPOT's advertising efforts as more of a 'when' not 'if'."
Overall, Goldman Sachs views Spotify as an industry leader in audio distribution, well-positioned for continued growth and enhanced profitability.