Analysts Remain Bullish On Spotify

Spotify Technology SA SPOT traded down 3.2% on Monday following the company’s earnings release. Analysts considered the pullback unfounded.

While ad and total revenue fell short of expectations, Spotify reported a beat in ad-supported monthly active users, average revenue per user, premium revenue and gross profit.

“These results were far better than some investors had feared, with 3rd party data tracking services suggesting subscriber shortfalls,” Credit Suisse wrote in a note.

Subs Drivers

Subscriptions were unaffected by Nordic price increases and the extension of free trials to 90 days.

“A major focus for investors has been Spotify’s test of its newly added three-month free trial period (up from one month) outside of its twice-a-year promotional cadence,” Nomura Instinet wrote. “Management noted that the new trial period didn't have a material impact on subs growth (increased to align with competitors), which should ease some of the concern that the move was in response to sluggish user trends.”

Meanwhile, the metric was seen to have benefited from Podcast adoption.

“Podcasting is likely an engagement, and therefore a Premium net additions, driver before it's a discrete advertising revenue driver,” Morgan Stanley wrote.

Margins Prospects

Bank of America was encouraged by margin trends driven by an improved product mix, reduced streaming delivery costs, customer service efficiencies and “premium revenue over-indexing.” It sees opportunity for continued growth through the penetration of AT&T Inc. T’s 3 billion-unit total addressable market, offering expansion from music to podcasts, “monetization of the Two-Sided Marketplace” and better label splits.

“Looking ahead, we believe the recent expansion of Duo pilot from five markets to 14 (including most of Latin America), the new partnership with AT&T in the U.S. (in early September) and new 90-day free trial offerings for Standard and Student Plans (in August) and Family Plans (in October) offer an ongoing tailwind for subscriber growth, however recent ad-supported MAU outperformance will likely take time to convert into premium subscribers in 2020,” Bank of America wrote.

Morgan Stanley expects eventual gross margin pressure from an increase in podcast investments, although Marketplace-driven click-through rates could offset the effect.

The Ratings

• Bank of America maintained a Buy rating and $230 price target;
• Credit Suisse maintained a Neutral rating but increased its target from $120 to $125;
• Morgan Stanley maintained an Overweight rating and $180 target; and
• Nomura maintained a Buy rating but cut its target from $190 to $180.

“Across TMT we believe scaled global distribution platforms will appreciate in value over time, that Spotify has the potential to benefit from global streaming music adoption and emerge as the clear market leader, and at current valuation levels the benefits of achieving that position are not even close to being priced in,” Morgan Stanley wrote.

Price Action

At time of publication, Spotify shares traded down another 2.6% at $136.51.

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