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

  • Benchmark analyst Mark Zgutowicz maintained Spotify Technology SA 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 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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