Spotify Analyst Finds Risk-Reward Compelling, But Sees Audiobooks Immaterial Into Year-End And 2023

Spotify Technology SA SPOT launched audiobooks in the U.S. last week.

What Happened: Commenting on the development, KeyBanc Capital Markets analyst Justin Patterson reiterated an Overweight rating and a $148 price target for Spotify shares.

Audiobooks could be immaterial to Spotify’s performance into the year-end and likely in 2023, too, Patterson said in a note.

Citing reasons for the deduction, the analyst said the revenue model for audiobooks is entirely transactional at launch. Secondly, it will take meaningful audiobook sales to move the needle, Patterson added.

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The analyst currently estimates audiobook sales of over two million units in the fourth quarter. This would add only less than 20 basis points to gross margin percentage, he added.

Spotify’s entry prices are competitive against smaller platforms, slightly more expensive than Amazon Inc.’s AMZN Audible and well above Apple Inc. AAPL and Alphabet Inc. GOOGL GOOG, Patterson noted.

“Our view is Spotify will adjust pricing and its model as it learns more from initial user behavior,” he said.

As the company improves discovery and selection and refines its model over the medium term, the analyst sees an opportunity for the gross margin to exceed 40% and lift consolidated gross margin into the low- to mid-30% range.

“We continue to find risk/reward compelling, with shares trading at 1.1x 2023E EV/S,” he added.

Price Action: In premarket trading, Spotify shares were rising 1.28% to $90.28, according to Benzinga Pro data.