Spotify (SPOT) PT Raised to $220 at JPMorgan
JPMorgan analyst Doug Anmuth raised the price target on Spotify (NYSE: SPOT) to $220.00 (from $205.00) while maintaining a Overweight rating.
The analyst comments "Spotify announced today that it is reducing headcount by 17% (~1,550 employees), the third wave of reductions this year (~600 employees in January & ~200 in June). We believe the reductions are broad-based across the company, including areas such as engineering, business units, and G&A roles. To account for related severance and additional real estate impairment, Spotify will take a €130M-€145M P&L charge in 4Q, and the company reduced its Operating Income/Loss guidance from positive €37M to negative -€93M to -€108M. Importantly, there was no change to 4Q guidance for 601M MAUs, 235M Premium Subscribers, and €3.7B revenue, and we believe underlying business fundamentals remain healthy. SPOT will incur cash costs similar to the €130-€145M range mostly during 1H24. Spotify continues to tighten spend, drive efficiencies, and operate faster, and we believe the reductions are a step toward achieving Spotify’s medium-term financial targets laid out at its 2022 Investor Day of 30-40% Gross Margins & 10%+ Operating Margin. Assuming an average salary of ~225k/employee, we estimate the reductions could drive ~€350M annualized savings, the bulk of which may drop down to profit, though we still expect SPOT to lean into growth investments. We’re updating our model to account for today’s headcount reductions and to refresh FX, the latter of which brings down our reported revenue ~1%. Our Operating Income almost doubles to €525M in 2024 and increases 50% to €804M in 2025. We increase our FCF estimates by 4% & 16% in 2024/2025. Entering 2024, we remain positive on Spotify and expect continued solid MAU and Premium Subscriber growth, near-term flip to positive podcast gross profit, ramping Marketplace contribution, solid Gross Margin expansion, and improved operating and net income. We remain Overweight and are increasing our December ’24 PT to $220 (from $205) based on 24.5x our 2025E EBITDA & 23x 2025E FCF, which equates to ~7x our ’25E Gross Profit of $5.4B."