On Tuesday, Citi analyst Jason Bazinet increased the stock price target for Spotify Technology S.A. (NYSE:SPOT), the popular audio streaming platform, to $500 from the previous $370 while maintaining a Neutral stance on the stock. This adjustment reflects a comprehensive update to the firm's valuation approach for Spotify.
The revision in the price target comes as Citi incorporates several changes into its valuation model. Bazinet detailed the modifications, which include extending the valuation year from 2025 to 2026, adding Spotify's net cash and investments to the valuation, and basing the valuation on Spotify's normalized Free Cash Flow (FCF). The normalized FCF calculation notably excludes temporary tax benefits related to Net Operating Losses (NOLs).
Despite the significant increase in the price target, Citi's neutral outlook on Spotify's shares remains unchanged. Bazinet explained that while the firm acknowledges the strength of Spotify's business strategy and its potential to maintain successful operations, they believe the current stock price already reflects an equilibrium of risk and reward.
The updated stock price target of $500 represents a substantial uplift from the previous figure, signifying a more optimistic view of Spotify's financial prospects in the coming years. The new valuation takes into account the company's cash position and investment portfolio, which are now seen as integral components of Spotify's overall value.
In his comments, Bazinet expressed confidence in Spotify's strategic direction and execution capabilities. However, the decision to retain a Neutral rating indicates that, despite the potential for growth, Citi advises caution as the stock price may already factor in the anticipated positive developments.
In other recent news, Spotify Technology SA (NYSE:SPOT) has reported third-quarter results which saw an increase in user estimates but a slight shortfall in revenue due to foreign exchange headwinds. TD Cowen raised Spotify's price target to $416 based on this performance and the company's promising margin progress.
Other financial firms, including Canaccord Genuity, Piper Sandler, and Benchmark, also increased their price targets for Spotify, citing strong profitability results, significant growth in gross margins, and robust subscription growth respectively.
The company's premium subscription business demonstrated significant growth, with the average revenue per user (ARPU) increasing by 11% year over year. Spotify's user base also grew by 14 million, reaching 640 million, while subscribers rose by 6 million to total 252 million. For the fourth quarter, the company anticipates continued growth, projecting an increase in Monthly Active Users (MAU) to 665 million and subscribers to 260 million.
These recent developments reflect the company's strategic focus on sustained profitability. Despite this positive outlook, several analysts, including those from Piper Sandler and Canaccord Genuity, have suggested that the current stock price fully values the company, indicating a cautious stance on the stock's future performance.
InvestingPro Insights
Spotify's recent financial performance and market position align with Citi's optimistic price target revision. According to InvestingPro data, Spotify's revenue growth remains strong at 18.52% over the last twelve months, with a notable 18.8% growth in the most recent quarter. This robust top-line expansion supports the bullish outlook on the company's business strategy.
InvestingPro Tips highlight that Spotify's net income is expected to grow this year, and 10 analysts have revised their earnings upwards for the upcoming period. These indicators suggest a positive earnings trajectory, which could justify the higher valuation implied by Citi's new price target.
However, investors should note that Spotify is trading at a high P/E ratio of 127.3, which aligns with Citi's neutral stance despite the increased price target. The stock's strong performance is evident in its 164.93% price return over the past year and its current trading near its 52-week high.
For those seeking a more comprehensive analysis, InvestingPro offers 21 additional tips for Spotify, providing a deeper understanding of the company's financial health and market position.
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