Analysts Positive On Spotify's Content Spending Despite Margin Impact

Spotify Technology SA SPOT posted an unexpected profit for its Q4 and forecast Q1'19 revenues in line with the consensus. The company also announced a couple of deals in the podcast marketplace.

The Analysts

Morgan Stanley's Benjamin Swinburne maintained an Overweight rating on Spotify shares with a $170 price target.

Guggenheim Securities analyst Michael Morris maintained a Neutral rating and $120 price target.

Raymond James analyst Justin Patterson reiterated a Strong Buy rating and lowered the price target from $195 to $182.

Morgan Stanley: User, Margin Growth Likely Over Time

As Spotify vertically integrates and enters the broader audio market, the related content spending will weigh on margins in 2019, Swinburne said in a Thursday note.

If the strategy proves successful, the company is poised to see incremental user and margin growth over time, the analyst said.

Excluding the impact of acquisitions and intended content spending on internally developed IP, gross margins were guided to about 25 percent in 2019 — 100 basis points lower than estimates, Swinburne said. Operating expenditure guidance also came in higher than expectations, he said.

Q4 premium net adds of 9 million exceeded expectations, driven by outperformance in Europe and the rest of the world. Churn fell, but less than expected, and engagement per MAU was up over 5 percent year-over-year, according to Morgan Stanley.

The sell-side firm raised its subscriber and revenue estimates and maintained its long-term margin and earnings estimates largely unchanged, as strong top-line growth counters a higher operating expense base.

See also: Spotify Investor Day And The Coming Wave Of Gen Z Investors, Consumers

Guggenheim Sees Increased Risk To Margin Expectations

Spotify is expected to see significant growth in the foreseeable future, given its value proposition for artists and consumers, Guggenheim's Morris said.

Consensus estimates have baked in expectations for a "multiyear acceleration in subscriber adds and revenue complemented by margin expansion," the analyst said.

With Spotify looking to increase investment in podcasts in a bid to increase appeal and long-term profitability, Morris said he sees increased risk to margin expectations, keeping him sidelined on the stock.

Raymond James Likes Podcast Play

Spotify's Q4 results and FY19 guidance weaken the bear case, with robust label negotiations, significant runaway for MAUs and strong premium subscriber numbers and ad revenue, Raymond James' Patterson said.

The degree and duration of content investment holds the key for the next leg of the story, the analyst said.

In the near-term, Patterson said he expects monetization to lag engagement, and consequently lowered his gross profit estimates for 2019 and 2020.

"Long-term, we believe podcasts benefit both engagement and gross margin and ultimately help distance Spotify from competitors."

The Price Action

Spotify shares were down 3.12 percent at $131.23 at the close Thursday.

Related Link: Survey Hints At Strong Quarter For Spotify