Spotify Clocked 500M Monthly Active Users, Its AI DJ Strikes Right Chord With Users: Analyst Raises Expectations

  • Keybanc analyst Justin Patterson maintains Spotify Technology SA SPOT with an Overweight rating, raising the price target from $140 to $160.
  • Spotify disclosed it surpassed ~500 million monthly active users (MAUs) in early March, and KeyBanc's Audio Survey and 3P data points reinforce momentum. U.S. Audio Survey and third-party data support MAU upside.
  • Spotify has had two significant product updates to start the year, including its AI DJ and a new mobile interface that enhances discovery. 
  • The analyst found both experiences engaging and anticipates Spotify seeing some lift in consumption in a Tuesday note titled "SPOT: 1Q23 Preview – The AI DJ's Got Users Fallin' in Love; Raise Price Target to $160"
  • As the company iterates against these products for the year, he expects meaningful benefits to hours listened, discovery, and monetization.
  • User growth, improving ad market, and further cost cuts prompt the analyst to expect a slight upside to KPIs on 1Q results and 2Q guidance and operating loss improving faster than consensus contemplates throughout 2024E.
  • As profitability improves and investors become more confident in long-term FCF generation, the analyst sees the opportunity for multiple expansions toward the bull case.
  • As a result of a higher subscriber base and ad forecast, the analyst increases his revenue and gross profit by 1% for 2023E/2024E to €13.6 billion/€15.9 billion and to €3.5 billion/€4.4 billion.
  • The analyst projects €3.10 billion in revenue (in line with the guide) 24.9% gross margin (in line with the guide for 1Q23E.
  • Patterson expects €3.27 billion in revenue (in line with Street), 25.1% gross margin (40 bps below Street), and €134 million operating loss (€2 million better than Street) for 2Q23E. 
  • Further, he estimates MAUs of 513 million (vs. Street's 511 million) and Premium Subs of 214 million (vs. Street's 213 million). 
  • The gross margin will be a closely watched metric, and the analyst expects Spotify to continue emphasizing that 1Q23 is the trough.
  • Price Action: SPOT shares closed higher by 0.62% at $134.61 on Tuesday.
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