On Tuesday, Spotify Technology SA (NYSE:SPOT) saw its price target increased to $345 from the previous $330 while retaining an Outperform rating by an analyst at Macquarie. The adjustment follows Spotify's first-quarter results, which revealed a user base growth and the highest gross margin in the company's history.
Spotify announced a 19% year-over-year increase in monthly active users (MAUs) reaching 615 million, although slightly missing the guidance by 3 million. The premium subscriber count met expectations at 239 million, marking a 14% increase from the previous year. Revenue was reported at €3.6 billion, aligning with forecasts. Notably, the company achieved a record gross margin of 27.6% and an operating income of €168 million, which was above consensus expectations.
The company's management acknowledged an overcorrection in marketing efforts that may have impacted MAU growth. However, they expect to see an increase in MAUs as the year progresses, despite potential churn from recent price hikes. While the guidance for the second quarter suggests a slowdown in MAU and subscriber growth, revenue is anticipated to be €3.8 billion, consistent with Macquarie's forecast. Furthermore, a significant rise in operating income to €250 million is projected for the quarter.
Profitability is being driven by a reduction in non-music costs, the success of the Marketplace platform, decreased streaming delivery expenses, and improvements in the podcasts and audiobooks segments. Despite a slight dip into negative territory in the first quarter due to seasonal advertising market slowdowns and lower pricing, Spotify's podcasting segment had achieved break-even status in the fourth quarter of the previous year. The company anticipates podcasting will be profitable in 2024.
Spotify also discussed the possibility of offering more diverse subscription tiers, such as music-only and audiobook-only options, as well as more flexible plans like daily and weekly passes in some markets. These initiatives aim to deliver higher perceived value to users, which could enhance the company's pricing power over time.
InvestingPro Insights
Following the upbeat report from Spotify Technology SA (NYSE:SPOT), InvestingPro data highlights a few key financial metrics that could be of interest to investors. The company holds a market capitalization of $60.19 billion, suggesting a significant presence in the market. Despite a challenging P/E ratio of -105.89, reflecting investor concerns over profitability, the firm's revenue growth remains robust with a 12.96% increase over the last twelve months as of Q4 2023. Additionally, Spotify has demonstrated a strong gross profit margin of 26.03% during the same period, indicating efficient cost management relative to its revenues.
Two InvestingPro Tips that may be relevant to current and potential investors are: Spotify holds more cash than debt on its balance sheet, providing financial flexibility and lowering risk; and despite not being profitable over the last twelve months, analysts predict the company will turn a profit this year, offering a potentially optimistic outlook for the firm's financial health.
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