Spotify (NYSE:SPOT) was raised to Buy from Hold at Pivotal Research Group on Thursday, with analysts raising the firm's price target for the stock to $265 from $170 per share.
The analysts told investors that their bullishness on the stock is based on a variety of factors, including its solid results and higher forecast for the company's long-term EBITDA.
The research firm is upping its forecast for Spotify's medium/long-term EBITDA/Free Cash Flow. This is based on the company's "renewed focus on financial discipline (which is highlighted by the ongoing recruitment of a new CFO) vs. what we view as a very large margin expansion opportunity," the analysts said.
The analysts also noted SPOT's "continued strong results and what appears to be an ability to take price without significant churn," while the firm also said it appears that "Spotify has won the digital audio streaming content war, allowing them to continue to generate solid unit and ARPU growth going forward."
SPOT's possible additional upside from leveraging their 600 million monthly active users moving to 1B longer term is another positive Pivotal pointed to, as well as a reduction in the discount rate in its DCF valuation methodology from 10% to 8% on falling interest rates,
"Our DCF valuation methodology utilizes a 15X '27 terminal EBITDA multiple (when we project SPOT will be growing at a ~40% rate) and the aforementioned 8% discount rate which drives our $265 target price up significantly from $170 previously," the analysts explained.