Spotify's Profitability Likely To Breakeven Driven By Subscription Pricing Power And Expense Discipline, Analysts Say

Keybanc analyst Justin Patterson maintained Spotify Technology SA SPOT with an Overweight and raised the price target from $125 to $140.

The analyst found evidence of resilient the subscription business with pricing power, improving expense discipline, and inflection of unit economics. 

The analyst expects break-even profitability for 2024E vs. a loss of €128M previously and believes progress toward this accomplishment represents a meaningful catalyst throughout the year.

Barclays analyst Mario Lu maintained an Overweight and raised the price target from $131 to $145. The 4Q results beat expectations across nearly every metric, and the 1Q OI guide continues the meaningful improvement expected in FY23 (along with GM expansion). 

The analyst believes the company's shift from growing at all costs to a combination of speed and efficiency will be applauded mainly by investors.

Morgan Stanley analyst Benjamin Swinburne maintained an Overweight and raised the price target from $105 to $130.

Swinburne highlights that the case for SPOT, even after the 40%+ YTD appreciation, is that 2023 will be the year this business finally marries the consistently strong user and revenue growth trends it has posted for years with a ramp towards meaningful profitability. 

The analyst saw rising optimism that it can drive low to mid-teens ex-FX revenue growth over the next several years, faster gross profit growth, and generate significant positive operating income and FCF beginning in '24/'25. 

While he raises his gross profit estimates by just 1-2%, he sees lower operating expense growth increasing his adjusted EBITDA estimates more substantially. 

Credit Suisse analyst reiterated Neutral with a $120 price target. Spotify saw healthy user growth, and the 2022 investment phase is shifting to a return to margin expansion in 2023 via belt tightening, both encouraging. 

Key remains when Spotify decides to raise the price, their success in improving their revenue shares with content providers as part of that, what level of pricing power the service has, how the competition will evolve, and how sustainable their focus on cost efficiency will be. 

The analyst did not see positive EBITDA until 2025, and at almost 40x our 2025 FCF estimate, their business model as a renter of their product continues to generate little cash flow despite their scale. 

Price Action: SPOT shares traded higher by 2.28% at $115.30 on the last check Wednesday.

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