Spotify Stock Sheds All Gains After Q1 Earnings, But Analysts Are Impressed With the Performance

On Tuesday, Spotify Technology SA SPOT reported fiscal first-quarter 2024 revenue of $3.95 billion (3.64 billion euros), up 20% year-on-year, beating the consensus of $3.85 billion. EPS of $1.05 (97 cents) beat the consensus of $0.70. Analysts offered their takes on the stock.

J.P. Morgan analyst Doug Anmuth maintained Spotify with an Overweight and raised the price target from $320 to $365.

Spotify is the largest pure-play audio streaming service and is both driving and benefitting from the ongoing secular shift from transaction-based to access-based streaming models, according to the analyst.

Gross margin strength is driven by music & marketplace gains, podcast improvement, other cost of revenue leverage, & advertising, with additional cost efficiencies helping to drive significant operating and net income growth & meaningfully higher FCF in 2024, Anmuth said. 

Also Read: Spotify Demonstrates Robust Financial Health With Impressive Q1 Revenue, Margin Improvements: Analyst

Notably, Spotify remains confident in achieving the medium-term financial targets laid out at its 2022 Investor Day of 30-40% gross margins and 10%+ operating margin, the analyst noted. 

He expects revenue growth to accelerate in 2024, supported by more balanced growth across Premium Subscribers. While MAU growth has decelerated, it remains strong at +19% in the first quarter, and Spotify will ramp up S&M spending through the year to support top-of-funnel improvements. 

Anmuth projected 2024 net adds of 81 million for MAUs (vs. 113 million in 2023) & 27 million for Premium Subscribers (vs. 31 million in 2023). 

As Spotify continues to add more value to its product offering, pricing will become an increasingly important revenue driver, and he expects the introduction of an audiobook tier and basic music/podcast tier across five markets in the second quarter, with a potential 2024 revenue upside from a broader rollout.

Overall, the analyst is confident in the company’s ability to accelerate revenue growth while meaningfully increasing profitability, and he noted Spotify maintained long-term pricing power. 

Anmuth expects second-quarter revenue and EPS of 3.81 billion euros and 1.21 euros, respectively.

Piper Sandler analyst Matt Farrell reiterated Spotify’s Neutral rating and raised the price target from $300 to $320.

Despite softer MAU trends and in-line subscribers, Spotify delivered gross margin well ahead of expectations, showing once again that the profitability dynamics matter most to investors, the analyst said. 

Specifically, the gross margin was 120 basis points ahead of expectations on the back of improved music and podcast profitability, while second-quarter operating income guidance of 250 million euros was well ahead of expectations. 

He said that the company has course-corrected its marketing spending to better address MAUs moving forward. Finally, Farrell added that the company reiterated its expectation of improving gross margin and operating margin as it moves through 2024.

Farrell expects second-quarter revenue and EPS of 3.80 billion euros and 1.21 euros, respectively.

Goldman Sachs analyst Eric Sheridan maintained Spotify with a Neutral and raised the price target from $277 to $317.

While Spotify’s first-quarter earnings report indicated a more neutral to downward bias to user trajectory (with roughly in-line subscribers but some softness at the top of the funnel), Sheridan noted the positive commentary and first-quarter results around both gross margin and operating margin as key drivers in Spotify’s outperformance. 

In terms of themes, the analyst noted that Spotify management anchored its earnings report and call around a few themes – all aiming toward compounded advertising revenue growth and improved ad-supported gross margin. 

The themes included striking a balance around user opportunity in terms of focusing on high LTV users, a focus on narrowing the price-to-value gap with price increases in 5 markets in second-quarter, continued discipline around driving operational efficiencies with both gross and operating margin guidance for second-quarter coming in above expectations, update on capital allocation priorities to come with new CFO start date in third-quarter and continued focus on scaling its offering around podcast and audiobook opportunities and increasing the scale of its global advertising efforts. 

Looking over a long-term horizon, Sheridan noted that Spotify has already proven its industry-leading position in the audio distribution landscape.

Sheridan expects second-quarter revenue and EPS of 3.80 billion euros (prior 3.84 billion euros) and 1.27 euros (prior 1.16 euros). 

Spotify stock gained over 114% in the last 12 months. Investors can gain exposure to the stock via Global X Social Media ETF SOCL and ProShares On-Demand ETF OND.

SPOT price action: Spotify shares traded lower by 7.34% at $281.06 at the last check Wednesday.

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