Proactive Investors - Spotify Technology SA (NYSE:SPOT) shares still lots of "room to run", said UBS as it upgraded its rating on the music streaming giant on the back of an expected break-even performance in the second half of 2023.
Ahead of its earnings on February 6, Spotify's continued focus on improving efficiency is leading to growing confidence from the analysts about management's ability to expand profit margins and improve its overall financial performance.
This improvement is expected to be supported by an increase in subscribers and monthly active users, regular price hikes, and rising advertising revenue, all contributing to a more favorable earnings outlook.
Analysts predict that following Spotify's break-even results in the second half of 2023, the company will generate over €770 million of EBITDA in 2024, with a compound annual growth rate of about 50% through to 2027.
"While investors have struggled in the past with valuation given lack of profitability, we expect SPOT to gain valuation support with EBITDA now firmly in positive territory and growth pegged against peers."
Strong growth in subscriber numbers is expected to continue, and the UBS analysts see the potential for more frequent price increases as a key driver for this growth, anticipating a price hike every 12-18 months.
Profit margins in Spotify's advertising-supported segment are seen getting a major boost as its podcast segment reaches financial break-even in the first half of 2024, with further to go in 2025 as podcasts become more efficient and more beneficial royalty agreements in the music segment kick in.
While the introduction of a consumption-based model for audiobooks "could represent some drag", but the analysts believe the impact will be "modest/managed".
The Swiss bank shifted its stance to 'Buy' from 'Neutral' and yanked its share price target to $274 from $170.