Analysts Rally Behind Spotify: Price Targets Raised After 17% Workforce Cut

Spotify Technology SA SPOT shares are currently trading $196.03 — up 0.96% in the past 24 hours. The spike occurred after the digital music service announced mass layoffs, or roughly 17% of its workforce.

This is Spotify's third reduction in the last year.

Spotify CEO Daniel Ek mentioned in an email to staff that the company is significantly reducing costs due to excessive hiring in 2020 and 2021, when funding was abundant for tech companies.

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Approximately 1,500 jobs are being cut in this latest round, according to CNBC.

Morgan Stanley analyst Benjamin Swinburne named the company as a Top Pick, and reiterated the Outperformance rating for SPOT shares.

Morgan Stanley raised Spotify's price target from $200 to $230.

"The journey towards profitability has just begun, we see upside to consensus earnings estimates, and believe the business is capable of $3bn+ EBITDA in '26E in a bull case (2.5x above consensus)," Swinburne wrote in an analyst note.

Moreover, the analysts highlight Spotify's accelerated growth due to its "superior product, pricing power, and continued industry growth."

The focus now revolves around profitability, earnings potential, and business quality. "Notably, Spotify's recent 17% reduction in headcount, totaling 23% for the year, emphasizes its pursuit of profitability and adherence to financial guidance," Swinburne said.

Morgan Stanley's upward adjustments in forecasts exceed the consensus, projecting a bullish $310 per share, reflecting a potential 60% increase. This forecast implies a trading range of 18-19x/25x '26E EBITDA/FCF, discounted to year-end 2024.

In addition to Morgan Stanley's insights, Macquarie Equity Research analyst Tim Nollen echoed the sentiment of Spotify's focused approach towards profitability and efficiency. He asserted that these strategic actions are pivotal for the company's trajectory.

"We reiterate our OP rating, raise our '24 estimates and raise our TP from $210 to $232," Nollen said.

Macquarie Equity Research estimated the severance costs of the layoffs ranging between €130 million to €145 million. This corresponds to approximately five months' worth of severance pay for affected workers and could potentially yield annualized cost savings of about €300 million for FY'24.

"Spotify's acceleration at scale is impressive. The company is set to add 100m MAUs this year to roughly total 600m, after adding 83m in '22 and 61m in '21," Nollen said.

And added: "We have written about Spotify's impressive audio additions to engage and attract subscribers while enabling pricing power, to ensure it remains competitive against Apple, Amazon Prime and YouTube Music. A positive and rising bottom line should provide a catalyst for the stock."

Meanwhile, Key Banc Capital Market analyst Justin Patterson reiterated the Overweight rating on SPOT, raising the 2024E and 2025E operating income by 84% and 40%, respectively, and raising the company's price target to $255 from $210 (2.4x 2025E EV/S).

"Spotify is a globally distributed audio service, with demonstrated subscription monetization (~87% of 2022 revenue) and an emerging advertising and creator monetization narrative," Patterson stated. "We believe improving monetization and unit economics can translate to a stronger positive revision cycle, and drive a re-rating."

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Photo by Alexander Shatov on Unsplash