On Wednesday, Benchmark analyst adjusted the stock price target for Spotify Technology SA (NYSE:SPOT), a leading audio streaming platform, increasing it to $375 from the previous $325. The firm maintained its Buy rating on the stock.
This adjustment follows Spotify's first quarter results, which revealed a 100 basis points improvement in premium gross margin quarter over quarter, signaling a significant shift towards music-only profitability.
The second quarter gross margin guidance provided by Spotify also surpassed expectations by 200 basis points, with a forecast of 28%. This projection, particularly in light of the additional costs of goods sold (COGS) associated with audiobooks, implies that the profitability of Spotify's music and marketplace segments is advancing considerably beyond the levels seen in 2023.
The change in revenue mix towards marketplace offerings appears to be a key factor in this profitability inflection. Still, the analysis also highlights the potential for Spotify to gain economic leverage over record labels due to increased podcast engagement, and in the future, audiobook content. Despite a noted weakness in monthly active user (MAU) growth, the focus remains on the potential for improved music content costs.
In support of the new price target, Benchmark has revised its discounted cash flow (DCF)-based analysis, reflecting an improved operating income growth trajectory. Moreover, the firm has increased its perpetual growth rate assumption for Spotify to 4.0% from the previous 3.0%.
This revision underscores the analyst's confidence in Spotify's continued growth and profitability, particularly as the company diversifies its content offerings and strengthens its position within the audio entertainment market.
InvestingPro Insights
As Spotify Technology SA (NYSE:SPOT) garners a revised price target from Benchmark, it's worth noting some key financial metrics and expert insights that could help investors understand the company's current position. With a hefty market capitalization of $60.19 billion, Spotify stands as a significant player in the audio streaming industry.
While the company's P/E ratio is currently negative at -105.89, indicating that it's not profitable as of the last twelve months, the InvestingPro Tips suggest a turnaround with net income expected to grow this year. This aligns with the optimism from Benchmark's analysis, which anticipates an improved operating income growth trajectory for Spotify.
InvestingPro Tips also highlight that Spotify holds more cash than debt, suggesting a solid balance sheet, and that its liquid assets exceed short-term obligations, providing financial flexibility. These aspects are crucial as the company ventures further into audiobooks and continues to expand its marketplace offerings.
Moreover, the company's stock has experienced significant price appreciation, with a 130.74% return over the last year and currently trading near its 52-week high, which is 95.05% of the peak price.
For investors looking to delve deeper into Spotify's financial health and future prospects, there are additional InvestingPro Tips available at: https://www.investing.com/pro/SPOT. To further assist with your investment decisions, use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription, unlocking more valuable insights. Remember, there are 14 more InvestingPro Tips that could guide you through the intricacies of Spotify's financial landscape.
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