Investors Have Warmed Up to Spotify's Q3 Outlook But Analyst Awaits Clarity

Piper Sandler analyst Matt Farrell reiterated a Neutral rating on Spotify Technology S.A. SPOT with a price target of $150.

Heading into the Q3 print in a few weeks, Spotify is up from the August lows, significantly outperforming significant indices. 

Farrell said investors have "warmed up" to the conservatism in the Q3 subscriber guidance following the disappointing net add assumptions for the quarter. 

Management provided relatively conservative guidance for subscriber net adds in Q3, calling for ~4 million net adds versus ~7 million in Q3 2022. 

However, it does appear investors have "warmed up" to the idea that trends in the quarter are better than feared based on his conversations. The analyst notes that the price increase only impacts one month of Q3 but will fully impact Q4. Consensus expectations call for ~8 million net adds for Q4, down from ~10 million last year. After the hiccup in the previous quarter, the bar is a little lower.

While the company's execution has improved over the last several quarters, he doubted the next catalyst for the stock, particularly with the announced price increase and the profitability story well understood from our perspective, the analyst writes. 

Q3 guidance assumes a revenue acceleration in the ad-supported segment after growing 12% in the second quarter. Comps do ease as they enter the year's second half, and the digital advertising market continues to perform better than feared. 

With cautious optimism from management, a further bounce back could provide upside, the analyst said. 

Spotify has continued highlighting improving user engagement as it rolled out a new user interface. However, the company recently decided to include audiobooks as a part of the subscription tier. 

The analyst highlights what this suggests about using this new vertical and the associated costs tied to the transition. As a result, he remains on the sidelines heading into the earnings announcement. 

The analyst will seek further clarity on subscriber trends as the price increases roll-out, incremental levers for gross and operating margin, and any signs of an advertising inflection.

He projects Q3 revenue of $3.30 billion vs. consensus $3.53 billion and EPS loss of $(0.27) vs. consensus $(0.23).

Price Action: SPOT shares traded lower by 1.13% at $155.82 on the last check Wednesday.