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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