Spotify Likely For Upside From Gross Profit Leverage, Pricing Power From Music Subscriptions, Analyst Say

Benchmark analyst Mark Zgutowicz maintained Spotify Technology SA (NYSE:SPOT) with a Buy and raised the price target from $125 to $130 in front of SPOT's 4Q report.
The consensus' 23E expectations understate Premium and Ad-supported gross profit leverage following '22's "trough" podcast profitability.
The analyst sought more transparency on management's suggested ~2x ARPU lift target from incremental podcast revenue per user.
The subsequent degradation of the '22E gross margin is optics as music's gross margin trajectory has exemplified steady Y/Y leverage.
The analyst continues to believe that the staple nature of music subscriptions, particularly Spotify's brand and expanding content, has material pricing "catch-up" relative to other premium SVOD services.
The analyst attributed zero terminal value to podcast margin contribution.
The price reflected a reduction in WACC and modest estimate increases.
The analyst still awaits a $1 North America standard pricing match to Apple Inc's (NASDAQ:AAPL) increase in June '22, driving an incremental $150M+ annual gross profit lift.
The analyst's '23E total company gross margin is -90bps below the '23 target for conservatism but notably +40bps above consensus.
The analyst expects a more meaningful podcast step function in '24E driving ad-supported gross margin lift.
Price Action: SPOT shares traded lower by 1.44% at $100.77 on the last check Monday.

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