On Tuesday, CFRA raised the price target for Spotify Technology SA (NYSE:SPOT) shares to $375 from $355, while maintaining a Buy rating on the company's stock. The firm's analyst cites the music streaming giant's revenue growth and expanding margins as key factors driving the positive outlook.
Spotify has recently demonstrated robust financial performance, with second-quarter earnings per share (EPS) reaching €1.33, surpassing consensus estimates by 33%. The company also reported a year-over-year revenue increase of 20%, with gross margins improving to 29.2% from 24.1%, and operating margins turning positive at 7.0%, a significant shift from the previous year's -7.8%.
The company's premium segment, which accounts for 88% of total revenue, saw a 21% increase year-over-year. Additionally, ad-supported subscribers, which are primarily in developing markets where advertisers cover the service costs, grew by 13% and represent 12% of the total. Spotify's total monthly active users (MAU) now stand at 626 million, marking a 14% increase year-over-year, with guidance set for 631 million MAUs in the third quarter.
Geographically, Europe makes up 28% of Spotify's total subscribers, followed by North America at 18%, Latin America at 22%, and the rest of the world at 32%. The company has seen substantial growth in family and duo plans. Free cash flow (FCF) was exceptionally strong at €490 million, compared to just €9 million, with the company guiding for operating income of €405 million in the third quarter, up from €266 million in the second quarter.
CFRA has also adjusted its earnings estimates, raising the 2024 EPS forecast by €0.50 to €5.35, and the 2025 forecast by €1.10 to €7.40, with revenue projections of €15.9 billion for 2024 and €18.0 billion for 2025. The firm's valuation of Spotify is based on a forward Total Enterprise Value to Earnings Before Interest, Taxes, Depreciation, and Amortization (TEV/EBITDA) multiple of 35.0x its 2025 EBITDA estimate, which is above the peer average.
In other recent news, Spotify Technology SA recorded a quarterly revenue of €3.81 billion, matching the predictions of Evercore ISI and other analysts. The operating income, however, surpassed estimates, reaching €266 million. Although the number of Monthly Active Users (MAUs) fell short of forecasts, the Premium Subscribers count exceeded expectations, reaching 246 million.
Analyst firms such as Evercore ISI, KeyBanc Capital Markets, and Citi have made varying assessments of Spotify's performance and future prospects. Evercore ISI increased Spotify's price target from $340 to $420, maintaining an Outperform rating, while KeyBanc raised its price target from $410 to $420, affirming an Overweight rating. Citi, however, maintained a Neutral stance with a price target of $310.
Deutsche Bank (ETR:DBKGn) and Piper Sandler expressed optimism about Spotify's market trends and emphasized the importance of profitability and user trends. These are the recent developments in Spotify's ongoing efforts to expand its services and improve its financial performance.
InvestingPro Insights
Following CFRA's upbeat assessment of Spotify Technology SA (NYSE:SPOT), InvestingPro data and tips offer additional perspectives on the company's financial health and market performance. Notably, Spotify holds more cash than debt on its balance sheet, which is a positive sign of financial stability. Additionally, analysts are optimistic about the company's future, expecting net income to grow this year. This aligns with CFRA's raised earnings forecasts and suggests a favorable outlook for the company's profitability.
InvestingPro data highlights Spotify's significant market capitalization of $66.36 billion and a robust revenue growth of 14.31% over the last twelve months as of Q1 2024. Moreover, the company's gross profit margin stands at a healthy 26.63%, reflecting its ability to manage costs and maintain profitability. Despite a negative P/E ratio of -540.17, which indicates that the company is not currently profitable, the substantial year-to-date price total return of 57.23% and a 1-year price total return of 72.06% illustrate strong investor confidence and market performance.
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