On Wednesday, Guggenheim maintained a Buy rating on shares of Spotify Technology SA (NYSE:SPOT) and increased the price target to $420 from the previous $400. This adjustment follows Spotify's reported financial performance, which surpassed expectations with a higher gross margin and strong free cash flow.
The company's gross margin reached 29.2%, exceeding the guidance of 28.1%, and contributed to better-than-anticipated operating profit. The positive results were attributed to lasting improvements in music profitability, marketplace performance, and operational efficiencies. Spotify's outlook for the third quarter suggests a gross margin of 30.2%, which is significantly above the 28.5% market consensus.
Spotify's Premium subscriptions also experienced a boost, with a net addition of 7 million users, surpassing the 6 million forecast. The outlook for the third quarter is set at an addition of 5 million Premium subscribers, aligning with consensus estimates.
Notably, the company has seen lower churn rates even after implementing price increases on about 40% of its subscription revenue. These increases have been more effective than the hikes in 2023, which affected approximately 75% of the Premium revenue base.
The potential introduction of a higher-priced 'Superfan' tier is anticipated to provide further avenues for revenue growth. While Monthly Active User (MAU) growth did not meet expectations, management expects a rebound driven by marketing and product improvements, coupled with solid engagement and conversion rates among free users.
Despite softer demand in Brand and upper funnel advertising leading to a 13% increase in ad revenue, below the 18% consensus, Guggenheim has raised its 2025 adjusted EBITDA forecast for Spotify to $2.51 billion, up from the previous $2.42 billion and well above the consensus of $2.07 billion. This optimistic revision underscores the firm's confidence in Spotify's continued financial growth and operational success.
In other recent news, Spotify Technology SA has been a focal point for analysts. Benchmark raised the company's price target to $430 from $405, citing Spotify's second-quarter free cash flow performance as a significant turning point.
The company's trailing twelve months free cash flow reached €1.3 billion, a notable increase attributed to operational expenditure efficiencies and gross profit leverage in both Premium and Ad-Supported segments. Despite a weaker-than-expected growth in new users, Spotify's pricing strategy and disciplined cost management are expected to sustain its free cash flow momentum according to Benchmark.
Simultaneously, Rosenblatt Securities adjusted its price target for Spotify, nudging it up to $399.00 from the previous $396.00. This decision followed Spotify's recent financial performance report, revealing revenues of €3,807 million and a substantial increase in premium subscribers exceeding expectations. The company added 7 million premium subscribers in the quarter, totaling 246 million, which was 1 million more than projected.
During its Q2 2024 earnings call, Spotify CEO Daniel Ek reported strong subscriber growth, beating expectations with 7 million net new additions. However, the company acknowledged a shortfall in monthly active users growth, particularly in developing markets. Spotify plans to bolster marketing and product enhancements to improve engagement and retention in these regions. These are recent developments and reflect the company's current financial health.
InvestingPro Insights
Following Guggenheim's positive outlook on Spotify Technology SA (NYSE:SPOT), InvestingPro data and Tips provide additional context for investors considering the stock. Spotify's market cap stands at a robust $65.85 billion, reflecting its significant presence in the streaming industry. Despite not being profitable over the last twelve months, the company's net income is expected to grow this year. This anticipated growth is supported by a strong revenue increase of 14.31% over the last year as of Q1 2023, signaling potential for continued expansion.
Investors should note that while Spotify holds more cash than debt, indicating a solid balance sheet, the stock has been trading at high valuation multiples, including a Price/Book ratio of 18.34 as of Q1 2023. Furthermore, the company's stock price has experienced notable movements, with a 102.05% return over the last year and a 76.04% year-to-date total return, highlighting its volatility but also the significant gains for shareholders.
Adding to this, Spotify's liquid assets exceed its short-term obligations, providing financial flexibility. For those seeking to delve deeper into Spotify's financial health and future prospects, there are over 10 additional InvestingPro Tips available. To explore these insights, investors can visit https://www.investing.com/pro/SPOT and use the coupon code PRONEWS24 to get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.