Spotify (SPOT) received an upgrade from UBS, with the firm raising its rating from Neutral to Buy, along with a price target increase to $274 per share.
UBS cited expectations for strong margin expansion and favorable bottom-line trends for Spotify driven by several key factors including strong subscriber loyalty, advertising growth, and steady price increases.
Yahoo Finance’s Alexandra Canal breaks down the details.
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Editor’s note: This article was written by Angel Smith
Video Transcript
SEANA SMITH: All right. Spotify shares are also moving to the upside here on a UBS upgrade, with the firm citing that they see sustainable margin expansion and stronger bottom line trends in the coming years.
“Yahoo Finance’s” Alexandra Canal has been digging into this report here for us. And Allie, at, least some optimism here when it comes to Spotify.
ALEXANDRA CANAL: Yeah. UBS upping that price target pretty significantly to $274 a share up from the prior 170, also upgrading the stock from neutral to buy.
Now, the firm really doubling down on the efficiency narrative that we’ve heard from CEO Daniel Ek over the past year or so. A big part of that includes sustained margin expansion, solid growth for both subscribers and ads along with the steady cadence of price increases.
And UBS does believe that those initiatives can remain intact throughout the year and, eventually, lead to sustained earnings and revenue growth. Now, one thing that Spotify has really struggled with is that valuation question, amid really a lack of profitability from this company. But it does seem like we’re turning a corner here with EBITDA now, finally, in solid positive territory.
UBS also expects podcasts to break even in the first half of this year. Remember, podcasts have been a very heavily invested area for Spotify. The company has spent upwards of $1 billion on building up that segment over the past few years. And once that happens, once we finally reach that break even for podcasts, it should serve as an inflection point for those ad-supported segment margins there.
So we’ll find out if these trends can continue once Spotify reports fourth quarter earnings early next week. But if you take a look at the stock prices here, we’re up more than 15% year-to-date, up more than 115% on the year. If you consider where we were even at the end of 2022, the rebound here has been pretty significant.
So it seems like, so far, investors are pretty confident heading into this print.
BRAD SMITH: All right. Big call on Spotify out today. Thanks for breaking it down for us, Allie Canal. In the words of Chris Stapleton, what are you listening to?