On Thursday, Wells Fargo reaffirmed its overweight rating on Spotify Technology SA (NYSE:SPOT), maintaining a price target of $420. The firm anticipates a solid third quarter for the audio streaming giant, though it expects less upside compared to the second quarter's performance. The analyst highlighted continued optimism regarding Spotify's profit margins, citing an improving position within the industry as the long-term investment thesis.
According to Wells Fargo, Spotify's capital allocation strategy and the potential announcement of a super premium service could positively influence the company's trajectory. The focus for the upcoming third quarter results is expected to be on profit margins. While the second quarter's margin beat is not anticipated to be replicated, the firm believes that margins in line with expectations will be satisfactory for investors.
The analyst pointed out several factors contributing to margin improvement, including ongoing progress in the music segment, podcasting turning profitable (including the exit of some exclusive shows), reduced impact from audiobooks, and other cost reductions related to revenue. After an impressive second-quarter performance, the firm suggests that maintaining third-quarter margins should be acceptable, including quarter-over-quarter accelerations for the third and fourth quarters.
Wells Fargo also noted that Spotify appears to be under-owned by long-only investors (LOs), suggesting that the stock may have room for increased institutional ownership.
In other recent news, Spotify Technology SA has been the subject of several analysts' notes. BofA Securities reiterated a Buy rating on Spotify shares, expecting the company's third-quarter revenue to slightly exceed its own guidance at €4.04 billion. The firm also anticipates the company's gross margin to align with the guidance at 30.2%, with monthly active users (MAUs) reaching 639 million. Jefferies, CFRA, and Pivotal Research have also maintained a "Buy" rating, while KeyBanc has retained an Overweight rating.
Spotify's second-quarter results showed a 21% year-over-year growth in premium revenue, increasing total MAUs by 14 million to 626 million. CFRA forecasts an EPS of $1.78 and revenues of $4.0 billion or more for Spotify's third quarter of 2024. Several financial firms have adjusted their price targets for Spotify, including Jefferies, CFRA, Pivotal Research, and KeyBanc.
Recently, Spotify has been involved in discussions around the European Union's regulatory environment for open-source artificial intelligence. The chief executives of Spotify and Meta Platforms Inc (NASDAQ:META). expressed concerns over the potential stifling of innovation due to complex and fragmented regulations.
InvestingPro Insights
Spotify's financial metrics and market performance align with Wells Fargo's optimistic outlook. According to InvestingPro data, Spotify's revenue growth remains strong, with a 19.83% increase in the most recent quarter. This growth trajectory supports the analyst's expectations for a solid third quarter.
The company's profitability is also improving, as evidenced by its positive EBITDA growth of 205.35% over the last twelve months. This aligns with Wells Fargo's focus on Spotify's improving profit margins and industry position.
InvestingPro Tips highlight that Spotify's net income is expected to grow this year, and the company has been profitable over the last twelve months. These factors reinforce the positive sentiment expressed in the Wells Fargo analysis.
Spotify's stock performance has been remarkable, with a one-year price total return of 142.54% and a year-to-date return of 99.43%. This strong market performance supports Wells Fargo's overweight rating and suggests that investors are recognizing the company's potential.
For readers interested in a deeper dive into Spotify's financials and market position, InvestingPro offers 18 additional tips, providing a comprehensive analysis of the company's strengths and potential challenges.
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