Spotify (SPOT) received a rating upgrade from UBS on Tuesday, with analysts saying they have increased confidence that the company's margin expansion is “sustainable.”
UBS analyst Bhatia Levy upgraded the stock to “neutral buy” and raised his price target to $274 from $179. This suggests an upside of about 25% compared to current levels.
“We believe efficiency efforts remain a focus and we have increased confidence in sustained margin growth and revenue growth trends in the coming years,” the analyst said.
“This, combined with solid subscriber and monthly active user growth, stable price increases and advertising growth, should lead to an improved EBITDA trajectory,” he said.
Spotify turned a profit in the third quarter for the first time in more than a year, as recent price increases and lower-than-expected costs related to payroll and marketing spending boosted revenue.
Analysts are generally bullish on Spotify after the audio giant pledged to improve profitability on a gross and operating profit basis starting in 2023.
“Investors have historically struggled with valuations due to lack of profitability, but with EBITDA now firmly in positive territory and growth fixed relative to peers, SPOT supports valuations. I hope we get it,” Levi asserted.
Spotify has spent $1 billion over the past four years entering the podcast market with splashy A-list deals and more than $400 million worth of studio acquisitions.
This expense significantly reduced gross profit and put significant pressure on profitability. In response, Spotify has committed to several rounds of layoffs, with three in 2023 alone. The company also announced that Chief Financial Officer (CFO) Paul Vogel will resign effective March 31st.
In addition to the layoffs, Spotify raised prices, changed its royalty structure, reorganized its podcast division, and made audiobooks free for paying members.
“We believe the company is on track to achieve breakeven in the podcast space in the first half of 2024, which should support margin changes in the advertising revenue segment,” Levi wrote.
It expected the division's full-year profit margin to reach 12% in 2024, up 3% from a year earlier.
The analyst added that he expects margins to improve further in 2025 “as podcast operating leverage proves and the music division benefits from new royalty agreements with labels.”
Spotify announced its earnings before the bell on February 6th. The stock has soared about 115% over the past year and is up more than 15% year-to-date.
alexandra canal I'm a senior reporter at Yahoo Finance. Follow her on Twitter @allie_canal, LinkedIn, Email alexandra.canal@yahoofinance.com.
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