Investors, Analysts Still Tuned In To Spotify

Swedish music streaming company Spotify Technology SA SPOT stock rebounded on Thursday after a Wednesday sell-off that followed a bigger-than-expected earnings loss and low subscription numbers.

Sell-side analysts also weren’t tuning out Spotify’s long-term prospect, despite the disappointing quarter, blaming subscription misses on the summertime inattentiveness of students and praising good average revenue per user.

The Analysts

Nomura Instinet’s Mark Kelley kept a Buy rating and a $190 rating on the stock.
Stifel’s John Egbert has a Buy rating on Spotify and raised the target price from $170 to $175.

Credit Suisse analyst Brian Russo kept an Underperform rating on the stock and a target price of $120.

Bank of America analyst Jessica Reif Ehrlich reiterated a Buy rating and a $230  price target.

The Theses

The company added 8 million new paying subscribers in the second quarter to take it to 108 million premium subscribers, but it missed its forecast of 8.5 million adds.

While subscriptions were a bit low, the company and analysts chalked it up mostly to a lack of marketing of student plans, because summers haven’t proven to be a good time to market to students.  

And underneath the subscription issue, the financials were better than expected, Ehrlich said. The company had stronger average revenue per user, churn and gross margin trends, and it had lower streaming costs that led to better gross margins. 

Ehrilich said there remains room for continued gross margin growth and increased value of the stock, citing the total potential size of the smart phone market, and continued improvements in advertising, among other drivers.

Nomura’s Kelley said the outlook for the remainder of the year was in-line to “marginally better” and noted outperformance in Spotify’s advertising business.

The Labels

“Importantly, the company is halfway through its label negotiations, and the tone of those conversations continue to be positive,” Kelley wrote in a note. “We came away from the call with a sense that the long-term trajectory is still on track and anticipate the subs’ miss to reverse course as the year progresses.”

Stifel’s Egbert also remains bullish, noting Spotify is growing subscribers at twice the rate of Apple Inc. AAPL's Apple Music or more, and said better marketing execution should help it make up for the second-quarter miss later in the year.

Egbert also cited guidance for better revenue growth, gross margins, and narrower operating loss ranges than its prior outlook.
“Spotify outperformed in top-of-the-funnel user growth, beat revenue forecasts alongside stabilizing ARPU, and nearly delivered an operating profit,” Egbert wrote.

Credit Suisse’s Russo remains bearish, however, noting the full year subscriber guidance moving lower at the bottom end. Based on the lower subscription numbers and guidance that anticipates the possibility of more of the same, Russo lowered projections for full year premium net subscriber adds.

Price Action

Spotify stock closed up 0.43% to $155.61 on Thursday.

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