TLDR
- Citizens raised its Spotify price target to $625 from $600, keeping a Market Outperform rating, citing AI product expansion including a new remix and cover tool with Universal Music Group.
- Morgan Stanley reiterated an Overweight rating with a $590 price target, saying Spotify has more investor credibility now than it did at its 2022 investor event.
- Spotify stock was up 16% on May 21 following its Investor Day, where management laid out a path to 1 billion subscribers.
- Q1 revenue rose 14% year over year to €4.5 billion, gross margin hit 33.0%, and free cash flow came in at €824 million.
- Premium ARPU rose 5.7% year over year in Q1 after a January U.S. price hike, with management reporting no unexpected churn.
Spotify held its Investor Day on Friday, and the market responded sharply. The stock was up 16% on May 21, trading at levels that have multiple Wall Street firms revisiting their price targets.
Citizens was among the first to move, raising its price target to $625 from $600 while keeping a Market Outperform rating. The firm pointed to Spotify’s push into AI-powered products as the main driver of the upgrade.
The centerpiece of that push is a new remix and cover tool, built through a licensing deal with Universal Music Group. It will be available as a paid add-on for Premium subscribers, which Citizens expects to be either margin neutral or margin accretive.
Citizens noted that Spotify is drawing on 20 years of proprietary taste data and 3.4 trillion daily signals to build these new products. The firm said those tools are aimed at driving retention and monetization over time.
The stock currently trades at a P/E ratio of 32.8 and 19.3 times 2027 estimated EBITDA. Its PEG ratio of 0.22 suggests the market may not yet be fully pricing in its growth runway.
Morgan Stanley Stays Bullish
Morgan Stanley reiterated an Overweight rating with a $590 price target, implying more than 30% upside from current levels. The firm’s note, titled “Investor Day Preview: Don’t Stop Believing,” made the case that Spotify has earned more credibility than it had in 2022.
Back then, Spotify outlined medium-term gross margin targets of 30% and an EBIT margin target of 10%. The market was skeptical. Spotify hit both ahead of schedule.
That track record is now part of the bull case. Morgan Stanley argues that Spotify’s scale means margin improvements can drive outsized earnings growth going forward.
Q1 Numbers Back the Story
Q1 results gave that argument some weight. Revenue rose 14% year over year to €4.5 billion. Operating income reached €750 million and free cash flow came in at €824 million.
With 293 million premium subscribers, incremental efficiency gains now move the needle more than subscriber growth alone. The question from here is whether Spotify can hold gross margins above 33% while funding AI and product development.
JPMorgan also moved its price target higher, raising it to $650 while keeping an Overweight rating. Jefferies lifted its target to $600 with a Buy rating, pointing to constructive 2030 targets.
The January U.S. price increase has held up better than some expected. Premium ARPU rose 5.7% year over year in Q1, with Q2 guidance pointing to growth of 7% to 7.5%. Churn came in without surprises.
Automated ad buying now drives more than 30% of ad revenue. Management shared that the free tier remains an area of focus for further monetization.
Raymond James reiterated an Outperform rating with a $555 price target ahead of the event. Barclays kept its Overweight rating and $500 target.
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