Yahoo Finance Spotify Profit Push Emboldens Bulls and Spurs Record Win Streak
(Bloomberg) -- It’s been less than a year since Spotify Technology SA raised prices on its US premium plans for the first time, and investors who bought into Chief Executive Officer Daniel Ek’s strategy have been rewarded with a roughly 80% jump in the stock.
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The shares are poised for a run of 10 consecutive monthly gains — their longest winning streak on record — as the firm moves to boost profits, shore in new subscribers and add new features. Even after doubling in the past 12 months, the stock is still about 14% below its 2021 peak and analysts see more room to run.
“Spotify has made steady progress toward profitability,” said Tejas Dessai, research analyst at Global X. “While earnings growth must keep pace, we see no catalysts that could hinder progress in the company’s fundamentals in the short-to medium-term.”
The company has lost money every year since it went public in 2018, as it pays out about 70% of its sales in royalties to the music industry. More recently, Spotify has moved to cut thousands of jobs and offer other types of entertainment, notably with a move into audiobooks that brings it in closer competition with Amazon.com Inc.’s Audible.
Read More: Spotify to Raise Prices, Launch New Plans for Books, Music
It plans to further boost subscription prices this year, having curtailed investment in original audio programming. Such efforts leave the firm on a strong setting, according to Dessai. “We believe they can sustain these advantages while continually trimming costs.”
Although the stock has taken a breather in recent weeks, analysts on average expect it to extend its current rally by another 9% over the coming year. Buy ratings have risen to an all-time high — 25 analysts recommend snapping up shares, 11 say to hold and only 1 says sell.
“The market loves seeing margin expansion on these companies as of late,” said David Wagner, a portfolio manager at Aptus Capital Advisors LLC.
Those who are cautious on Spotify point to its valuation; even though it’s come down this year, shares trade at about 50 times forward earnings. The tech-heavy Nasdaq 100 trades at about 26 times future earnings. “From a valuation perspective, it’s pretty rich,” said Brian Frank, a portfolio manager at Frank Capital Partners LLC.
Read More: Spotify CEO Ek Cashes In on Streaming Giant’s 267% Stock Rebound
Still, one of the stock’s biggest bulls on the Street, Justin Patterson at KeyBanc Capital Markets, raised his price target to $400 in April, saying that Spotify was “breaking out of the tortured profits department,” a nod to Taylor Swift’s newest album.
“Bigger picture, Spotify is demonstrating that margins are improving faster than envisioned and that at least mid-teens revenue growth is sustainable,” Patterson wrote. He added that with operating profit projected to double, KeyBanc sees Spotify “as having one of the more compelling profit ramps in Internet.”
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