On Friday, CFRA raised its rating on Spotify Technology SA (NYSE:SPOT) from Hold to Buy, setting a stock price target of $325. The firm believes that the current share price presents an opportune moment to invest in Spotify, citing a recent pullback from this week's high as an attractive entry point for the stock.
The upgrade follows an increase in the firm's earnings per share (EPS) estimates for the upcoming years. On April 23, the EPS forecast for 2024 was raised to EUR 4.85 from EUR 2.40, and for 2025 to EUR 6.30 from EUR 3.95. The new price target is based on a forward Price-to-Earnings (P/E) ratio of 67.0 times the 2024 earnings estimate, which is below Spotify's five-year historic average P/E ratio of 78.0 times.
CFRA's analysis suggests that Spotify is on a path to profitable growth with expectations for higher unit volumes and expanding margins. Revenue forecasts for the company are set at EUR 15.8 billion for 2024 and EUR 17.6 billion for 2025, compared to EUR 13.2 billion in 2023.
Gross margins for the first quarter of 2024 ended at 27.6%, showing a 90 basis points improvement quarter-over-quarter, aided by cost discipline and one-time restructuring charges. The firm anticipates gross margins for 2024 to be between 28.0% and 29.5%.
The firm commended Spotify's performance in the music streaming market, highlighting its growth and stability compared to the disruptions faced by video streaming services. Spotify's strategy has been focused on increasing its Monthly Active Users (MAU) and revenue, which is now translating into higher earnings and Free Cash Flow (FCF).
According to CFRA, Spotify still has significant potential for growth in developing countries and further market penetration in developed regions.
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