Spotify (SPOT) Gets Two Upgrades as Yesterday's Selloff Yielded Attractive Opportunity

July 29, 2021 10:24 AM EDT
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Price: $230.20 -1.98%

Rating Summary:
    21 Buy, 15 Hold, 3 Sell

Rating Trend: = Flat

Today's Overall Ratings:
    Up: 17 | Down: 5 | New: 36
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Spotify (NYSE: SPOT) received two stock upgrades today to see its shares trade nearly 1% higher.

Yesterday, the company reported that podcast listening surged 30% among those users that already listen to podcasts. As a result, podcast ad revenue soared by 627%.

“The continued outperformance is currently limited only by the availability of our inventory, which is something we’re actively solving for,” said CEO Daniel Ek.

“The days of our ad business accounting for less than 10% of our total revenue are behind us, and going forward, I expect ads to be a substantial part of our revenue mix.”

The company said it serves 365 MAUs, out of which 165 million are paid subscribers.

Hence, UBS analyst Batya Levi upgraded SPOT to “Neutral” from “Sell” and raised the price target to $240.00 per share from $235.00. The analyst cites better financial results, expectations for improving MAU trends post-pandemic, and traction with new initiatives.

“We see SPOT as a secular winner in the audio space given the size of its user base and pace of innovation. While early days, the podcast strategy appears to be playing out, creating flywheel effects with a larger pool of creators driving better engagement, subscriber retention and faster advertising revenue growth. The company's evolution from a music application to an audio platform should heighten product differentiation while increasing exposure to other forms of monetization, including the red hot market for digital advertising,” Levi wrote in a note.

In addition to the above-mentioned factors, Levi also mentions the stock's recent underperformance as one of the factors behind an upgrade. Shares of the company are down more than 27% YTD after falling 5.74% yesterday to hit a new 2-month low.

The stock’s underperformance has created an “attractive opportunity,” stresses Guggenheim analyst Michael Morris. For him, SPOT “has established a sustainable position as the global audio industry leader.”

Morris upgrades to “Buy” from “Neutral” and hiked the price target to $265.00 per share from $245.00.

“Our prior concern was that investor expectations left modest upside for share performance. We now see shares as more attractively priced for their long-term growth potential, which we anticipate will be driven by a best-in-class user experience, industry-leading product innovation and growing content differentiation via podcasting and voice chat. Over the coming quarters, we see modest premium pricing power (as reflected in ARPU stability), advertising growth and gross margin expansion as potential catalysts. Longer-term, we believe that the company has opportunities to drive deeper engagement in cars and in local markets (both domestic and internationally), which we believe remains under-appreciated in consensus forecasts,” Morris says in a memo on SPOT.

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