Spotify Smashes Gross Margin Guidance, Analysts Expect 'Continued Momentum'

Shares of Spotify Technology SA (NYSE:SPOT) climbed in early trading on Wednesday, after the company reported its second-quarter results.

The results came amid an exciting earnings season. Here are some key analyst takeaways.

• Bank of America analyst Jessica Reif Ehrlich reiterated a Buy rating, while raising the price target from $380 to $430.
• Goldman Sachs analyst Eric Sheridan upgraded the rating from Neutral to Buy, while lifting the price target from $320 to $425.
• JPMorgan analyst Doug Anmuth reiterated an Overweight rating, while raising the price target from $375 to $425.
• Rosenblatt Securities analyst Barton Crockett maintained a Buy rating, while lifting the price target from $396 to $399.

Check out other analyst stock ratings.

BofA Securities: Spotify reported its gross margins, operating income and free cash flows higher than expectations, although revenue was in-line and MAUs below, Reif Ehrlich said in a note. The lower MAUs of 626 million was due to "some deceleration in developing markets, along with advertising which is ramping slower than anticipated," she added.

"Encouragingly, it does not appear decelerating MAUs are having a material impact on premium subscribers, and SPOT is taking corrective measures to improve the MAU trajectory," the analyst stated. The quarterly results and guidance indicate "continued momentum in gross margin and operating income trajectory.”

Goldman Sachs: Spotify's second-quarter earnings reflected "an overall solid report," driven by higher premium subscriber adds, in-line revenues and gross margin beating the guidance by around 110 basis points, Sheridan said in the upgrade note. Management guided to operating momentum in premium subscribers, gross margin and operating profit in the third quarter, he added.

"SPOT is the clear global audio platform leader, which we expect to translate into elements of scaled compounded user growth, rising engagement across multiple format structure & pricing power for our operating forecast period," the analyst further wrote.

JPMorgan: The company exhibited continued operating discipline and "further signs that it can be a strong business, and not just a great product," Anmuth said. "Importantly, SPOT's 3Q outlook touches the low end of its medium-term financial targets of 30-40% Gross Margin & 10%+ Operating Margin," he added.

Although MAU growth slowed in the quarter, net adds could accelerate in the back half of 2024 and into 2025, driven by marketing and product enhancements, the analyst stated. He expressed confidence in the company delivering "accelerating revenue growth in 2024 while meaningfully increasing profitability."

Rosenblatt Securities: Spotify's revenues matched guidance but grew by merely 21% year-on-year in constant currency terms, Crockett said. Premium subscribers rose by 7 million to 246 million, 1 million above guidance, while ARPUs grew by 10% year-on-year in constant currency terms, he added.

"Gross margin of 29.2% smashed the guide for 28.1%," the analyst wrote. "Spotify cited weakness in brand advertising, and said it plans next year to pivots more to programmatic and self-serve direct response ads," he further stated.

SPOT Price Action: Shares of Spotify had risen by 2.69% to $339.68 at the time of publication on Wednesday.

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