On Wednesday, Deutsche Bank (ETR:DBKGn) adjusted its outlook on Spotify Technology SA (NYSE:NYSE:SPOT), raising the music streaming company's price target to $500 from the previous $440, while maintaining a Buy rating on the shares.
"Spotify posted a strong 3Q print with gross margins that once again came in well above expectations," the firm said.
The company's gross margins reached 31.1%, approximately 0.9% higher than both Deutsche Bank's and other analysts' predictions of 30.2%. This performance was attributed to the successful implementation of recent price hikes, which compensated for weaker ad-supported revenue.
Spotify's ability to surpass gross margin expectations is seen as a significant factor in challenging the prevailing skepticism regarding the company's potential for structural margin growth. The analysts noted that the positive shift in unit economics, with the company guiding towards an additional 0.7% quarter-over-quarter margin expansion for the fourth quarter, should further weaken the bearish perspective on Spotify's business model.
Additionally, concerns regarding the growth of Spotify's user base appear to have been mitigated. The company's outlook for fourth-quarter Monthly Active Users (MAUs) was 4 million higher than what analysts had estimated prior to the earnings release. This development is perceived as lifting a previous concern that had been weighing on the stock's performance.
Spotify Technology S.A. announced robust Q3 2024 results, demonstrating significant growth in both its user base and revenue. The company reported an increase of 14 million in Monthly Active Users (MAU), reaching 640 million, and a rise in subscribers by 6 million, totaling 252 million. With a year-on-year revenue increase of 21%, the total revenue for Q3 reached EUR 4 billion, with premium revenue up by 24%.
Looking ahead, Spotify anticipates continued growth, with projections indicating an increase in MAU to 665 million and subscribers to 260 million in Q4. The company also expects total revenue to reach EUR 4.1 billion in the next quarter, with an improved gross margin of 31.8% and an operating income of EUR 481 million.
InvestingPro Insights
Spotify's recent performance aligns with several key metrics and insights from InvestingPro. The company's stock has shown remarkable strength, with a 145.01% price total return over the past year and a 123.19% return year-to-date. This robust performance is reflected in the stock trading near its 52-week high, with the price at 99.85% of its peak.
InvestingPro Tips highlight that Spotify holds more cash than debt on its balance sheet, which could provide financial flexibility as it continues to expand its margins and user base. Additionally, net income is expected to grow this year, supporting Deutsche Bank's optimistic outlook.
However, investors should note that Spotify is trading at a high earnings multiple, with a P/E ratio of 166.07. This valuation suggests that the market has high expectations for future growth, which aligns with the company's recent performance and Deutsche Bank's increased price target.
For those seeking a deeper analysis, InvestingPro offers 20 additional tips for Spotify, providing a comprehensive view of the company's financial health and market position.
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