UBS Upgrades Spotify and Raises Price Target on Sustainable Margin Expansion

Spotify Stock

In a recent development, Spotify (NYSE:SPOT) has garnered an upgrade from UBS, positioning the music streaming giant for a positive trajectory. Analyst Batya Levi, expressing increasing confidence in the sustainability of Spotify’s profit margin expansion, upgraded the stock from Neutral to Buy. The price target was also raised to $274 per share, indicating a potential 25% upside from current levels.

Levi emphasized the company’s commitment to efficiency initiatives, foreseeing sustained margin expansion and robust bottom-line trends in the upcoming years. The focus on efficiency, combined with consistent growth in subscribers and monthly active users, periodic price increases, and advertising growth, is expected to contribute to an enhanced EBITDA trajectory.

Spotify’s third-quarter profit marked a significant milestone, breaking a year-long streak of losses. Recent price adjustments and lower-than-anticipated costs related to personnel and marketing expenditures played a pivotal role in boosting the company’s bottom line.

The audio giant’s aggressive push into the podcast market over the last four years, involving high-profile deals and substantial studio acquisitions, impacted gross margins and profitability. To address this, Spotify underwent several rounds of layoffs in 2023, committing to improve profitability starting in 2023 on both gross margin and operating income fronts.

Levi anticipates that Spotify will achieve break-even in the podcast segment in the first half of 2024, supporting an anticipated improvement in ad-supported segment margins. He predicts a 12% margin for this segment in full year 2024, reflecting a 3% increase from the previous year.

Looking ahead, Levi envisions further margin improvement in 2025, attributing it to operating leverage in the podcast segment and advantageous new royalty agreements with labels. Spotify is set to report earnings on February 6, and Levi’s positive outlook aligns with the company’s robust performance, witnessing a 115% surge in shares over the past year and a 15% increase year-to-date.

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