6 Spotify Analysts Break Down Q4 Results As Stock Plunges: Are There Any Catalysts Ahead?

Zinger Key Points
  • The investor event Spotify plans to host in the second quarter could be a catalyst for shares, BofA said.
  • "Shares do not reflect Spotify's opportunity to scale its business into meaningful profits, which keeps us bullish at these prices despite the continued flat margin outlook," Morgan Stanley said.
  • Spotify said it has not witnessed any related attrition to date from the recent Joe Rogan controversies, although stating that it may be too early to predict, the Roseblatt Securities analyst noted.
  • The negative after-hours stock reaction stemmed from changes in guidance practices and uncertainty on gross margin, said KeyBanc Capital Markets analyst.
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Spotify Technology SA SPOT shares are plunging after the music streaming service issued lackluster user growth guidance.

The Spotify Analysts: BofA Securities analyst Jessica Reif Ehrlich maintained a Buy rating and a $352 price target on Spotify shares.

Morgan Stanley analyst Benjamin Swinburne maintained an Overweight rating and a $300 price target.

Rosenblatt Securities analyst Mark Zgutowicz reiterated a Buy rating but reduced the price target from $350 to $220.

Raymond James analyst Andrew Marok maintained a Market Perform rating.

Credit Suisse analyst Douglas Mitchelson maintained a Neutral rating and lowered the price target from $270 to $238.

KeyBanc Capital Markets analyst Justin Patterson maintained an Overweight rating and a $260 price target.

BofA Sees Q2 Investor Event As Catalyst: Spotify reported fourth-quarter revenue, gross margin and monthly active users all exceeded expectations, Reif Ehrlich said. The revenue growth, the analyst said, was helped by the 40% increase in Ad-supported streaming. Gross margin benefited from a favorable mix shift towards podcasts and marketplace activity, he added.

The company also revised its guidance policy and said it will provide only quarterly guidance due to the multi-year nature of its investments, the analyst noted. MAU and premium subscriber trajectory should closely mirror 2021 levels, the analyst said, citing the company.

The first-quarter guidance was largely in line to slightly better on revenue, subscribers, and MAUs but was lower on gross margins and operating income, Reif Ehrlich said.

The investor event the company plans to host in the second quarter could be a catalyst for shares, BofA said.

Related Link: Why A Podcast Is A 'Hobby' For Apple And 'Career' For Spotify

Morgan Stanley Sees More Positives Than Negatives: There are more positives than negatives in the fourth-quarter results and the 2022 outlook despite the lack of a gross margin inflection baked into the guidance, Swinburne said.

The analyst raised his MAU estimate after the stronger-than-expected results but maintained the premium net adds expectations.

The strength in the fourth-quarter advertising revenues will carry into 2022, the analyst said.

Advertising strength, Swinburne noted, translates into gross margin expansion in contrast to Premium revenue growth.

"Shares do not reflect Spotify's opportunity to scale its business into meaningful profits, which keeps us bullish at these prices despite the continued flat margin outlook," Morgan Stanley said.

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Rosenblatt Adjusts Model Following Spotify's Q4: Following the quarterly results, Rosenblatt maintained its net-adds expectations relatively unchanged, Zgutowicz said. The analyst raised his 2022 non-GAAP operating expenditure guidance to reflect increased investment outside of the U.S.

Rosenblatt's first-quarter revenue estimates are reduced modestly to reflect a slightly lower MAU count, the analyst noted. The 2022 revenue guidance was raised to reflect a 6.1% greater contribution from ad-supported, partially offset by a 0.3% reduction in Premium revenue, he added.

Spotify said it has not witnessed any related attrition to date from the recent Joe Rogan controversies, although stating that it may be too early to predict, the analyst noted.

Spotify Shares Are Appropriately Valued: Despite a weaker-than-expected outlook for the first quarter, qualitative commentary for the rest of 2022 seemed to be roughly in line with prior expectations, Marok said.

"We continue to see a balanced risk-reward outlook for Spotify, and we maintain our Market Perform rating as we believe shares are appropriately valued at ~8x 2023E gross profit," the analyst said.

Debate On Long-Term Margins Is Far From Settled, Credit Suisse Says: There are concerns regarding content costs, as music labels will remain difficult partners and leading podcast talent will be pricey when renewing exclusive contracts in coming years, Mitchelson said. Additionally, competition might restrain pricing power and platform monetization, the analyst added.

"Overall, perhaps the margin guide was a set-back in the short term, but we expect the ultimate debate on Spotify long-term margins is far from settled," the analyst wrote in the note.

KeyBanc Delves In On What Caused Negative Stock Reaction: The negative after-hours stock reaction stemmed from changes in guidance practices and uncertainty on gross margin, Patterson said.

The analyst added that there is no material change to quarterly guidance and margin reflects investment in areas where Spotify sees positive returns, Spotify's margins should still be flattish year-over-year, he added.

In short, business seems fine, Patterson said.

SPOT Price Action: At last check, Spotify shares were plunging 16.53% to $160.19, closer to its 52-week low of $155.57, than high of $387.44.

 

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Posted In: Analyst ColorEarningsPrice TargetReiterationTop StoriesAnalyst RatingsMoversTrading IdeasAndrew MarokBenjamin SwinburneBofA SecuritiesCredit SuisseDouglas MitchelsonJessica Reif EhrlichJustin PattersonKeyBanc Capital MarketsMark ZgutowiczMorgan StanleyRaymond JamesRosenblatt Securities

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