On Wednesday, Deutsche Bank (ETR:DBKGn) maintained a Buy rating on Spotify (NYSE:SPOT) shares and raised its price target to $440 from $430. The firm's analyst cited the company's upcoming third-quarter earnings report, scheduled for after the market close on Tuesday, November 12th, as a key event to watch. Spotify's performance has been strong, with shares increasing by 15% since the second-quarter announcement, outpacing the S&P 500's 4% rise.
The analyst focused on Spotify's gross margins, highlighting the impact of U.S. audiobook price increases. These increases are expected to contribute to an approximate 80 basis points quarter-over-quarter expansion in premium gross margins for the third quarter, following a 120 basis points uplift in the second quarter of 2024.
The buy-side expectations for Spotify's third-quarter gross margins are around 31%, which is 100 basis points above guidance and street estimates.
Spotify's user metrics remain stable, with the analyst maintaining a 639 million monthly active user (MAU) estimate for the third quarter, aligning with guidance and street estimates. The premium subscriber estimate stands at 251 million, slightly ahead of the street's 250 million prediction.
However, the fourth-quarter outlook for premium subscriber net additions has been slightly reduced to 8 million from 9 million, which is still ahead of the 10 million net additions in the fourth quarter of 2023.
The analyst also noted the potential for further price increases in emerging markets, given recent developments such as YouTube Premium's price hikes and the closure of TikTok Music. Upcoming audiobook surcharges in Canada, Ireland, and New Zealand, along with price hikes in other markets, could lead to significant incremental revenue and gross profit in fiscal year 2025.
With the expansion of audiobook offerings to France, Belgium, and the Netherlands, there is anticipation of further roll-outs in Western Europe. The competitive environment is deemed healthy, with the analyst expecting gross margins to continue exceeding expectations due to audiobook surcharges and competitor price increases. The raised price target of $440 is based on 34 times the firm's fiscal year 2025 EBITDA estimate of €2.3 billion.
In other recent news, 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.
Alphabet (NASDAQ:GOOGL) Inc's Google Cloud, on the other hand, recently unveiled its Axion CPU, adopted by Spotify Technology (NYSE:SPOT) and Paramount Global to improve their streaming services. This development marks Google Cloud's entry into the competitive market of Arm-based technology, positioning it alongside major players such as Intel Corporation (NASDAQ:INTC) and Advanced Micro Devices (NASDAQ:AMD).
In more recent developments, Spotify has been the subject of multiple analyst notes. Rosenblatt Securities raised its stock price target for the company, maintaining a "Buy" rating due to positive forecasts for Spotify's upcoming third-quarter earnings report.
KeyBanc Capital Markets also increased their price target for Spotify, maintaining an Overweight rating, citing consistent annual revenue increases and robust operating margins.
Wells Fargo (NYSE:WFC) reaffirmed its overweight rating on Spotify, expressing optimism for the company's profit margins. These developments provide insights into the recent movements within these companies, shaping the landscape for investors and market watchers alike.
InvestingPro Insights
Spotify's strong market performance, as highlighted in the article, is reflected in the latest InvestingPro data. The company's stock has shown a remarkable 128.79% price total return over the past year, significantly outperforming the S&P 500's 4% rise mentioned in the article. This aligns with the InvestingPro Tip that Spotify has had a "High return over the last year."
The article's focus on Spotify's gross margins and potential for further price increases is particularly relevant when considering the InvestingPro data showing a gross profit margin of 27.54% for the last twelve months as of Q2 2024. This figure could potentially improve with the expected 80 basis points expansion in premium gross margins for the third quarter, as discussed in the article.
Additionally, the InvestingPro Tip indicating that "Net income is expected to grow this year" supports the overall positive outlook presented in the article. This growth expectation, combined with the company's strong revenue growth of 16.5% over the last twelve months, suggests that Spotify's financial performance is on an upward trajectory.
For investors seeking a more comprehensive analysis, InvestingPro offers 17 additional tips for Spotify, providing a deeper understanding of the company's financial health and market position.
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