Spotify sounding better to analysts as company tunes into profits

Key Points

• Spotify stock is trading at its best levels since December 2021, with a recent surge on robust revenue growth and return to profitability. 
• Upside trading volume suggests institutional investors are accumulating shares.
• After the company's fourth-quarter report, several analysts increased their price targets. 

Spotify Technology S.A. NYSE: SPOT is trading at its best levels since December 2021 on the strength of hardy revenue growth and a return to profitability. 

Spotify is a global music streaming service with 236 million paying subscribers. It went public in 2018, so is still in that zone when it’s a new enough company to post some big price gains. 

In addition to the earnings and revenue increases, the Spotify chart offers clues as to the stock’s pre-rally set-up, and how investors and traders can identify the next buy opportunity on a pullback.

• The 5-day moving average crossed above the 21-day line on January 9
• That was an early signal of buying before the stock broke out of a flat base, above $202.88. 
• The 5-day, 10-day and 21-day averages converged in the second half of December, another sign of increased buying.
• Since the start of 2024, Spotify stock notched seven weeks of upside trading volume, a sign that institutions are accumulating shares.

MarketBeat’s Spotify earnings data show the company reporting profitability in the quarter ending in September 2023; that was the first quarter with a profit since March 2022. 

Pivot to profitability

The company has not yet had a profitable year, but that’s expected to change, as Wall Street is eyeing earnings per share of $3.80 this year, and $5.32 in 2025. 

In the most recent earnings report, Spotify CEO Daniel Ek addressed the company’s shift to a focus on profitability. 

“I know some of you may start to wonder if we are sacrificing growth for profitability,” he said. “Long term we believe that the real value of Spotify is in solving problems at the intersection between creators and consumers. With scale, there will be even more opportunities to do so.”

He added that “growth is still the most important thing we can deliver,” with a focus on revenue growth, in addition to efficiency, as a driver of profitability. 

Deep-pocketed rivals

Spotify is at the point in its life cycle where it has to take both growth and profitability seriously.

It competes in an arena with plenty of heavy hitters, including mega-cap technology stocks Apple Inc. NASDAQ: AAPL, Alphabet Inc. NASDAQ: GOOGL and Amazon Inc. NASDAQ: AMZN. 

Other significant rivals include SoundCloud and Sirius XM Holdings Inc. NASDAQ: SIRI.

Luxembourg-based Spotify has a market capitalization of $47.24 billion, and revenue growth accelerated in each of the past five quarters. 

That puts the company in a position to be competitive. Still, when a relatively new public company enters a market with numerous rivals, particularly those backed by substantial financial resources, it faces some formidable challenges. 

These include tough competition for market share, the need for significant investment to drive growth and attract talent, and the pressure to differentiate its offerings effectively.

Wall Street boosting price targets

Spotify analyst forecasts show increasing optimism about the stock. Since the fourth-quarter report on February 6, seven analysts increased their price targets or upgraded their ratings. 

The consensus view is “moderate buy,” with a price target of $223.36. That’s a downside of 8%, but in this case, a pullback would be a constructive development, as Spotify stock is extended 16.5% above its 50-day moving average. 

In addition, the stock has been on a tear, returning 31.05% this year. The stock is ripe for some profit-taking before its next rally. 

For those reasons, a pullback into a very normal correction of 8%, or even more, could offer investors an opportunity to scoop up shares of a stock that Wall Street is increasingly bullish about. 

Growing the number of active users

In a February 17 report, CFRA analyst Kenneth Leon wrote that Spotify is executing on a strategy to realize higher revenue and more monthly active users, while turning to profitability.

“We think SPOT can grow profitably with gross margins in the upper-20% range,” Leon wrote. “We like the music streaming market’s attractive growth and stability versus the disruption seen in video streaming.”

He added that growth drivers will be revenue streams from advertising and ad-supported subscription plans, with ad-supported revenue increasing 12% in the fourth quarter.