Spotify stock profits attract analysts’ attention

Spotify Technology SA NYSE: POINT is trading at its best levels since December 2021, boosted by robust 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 it’s still in that zone when it’s a new enough company to see notable price increases.

In addition to earnings and revenue increases, Spotify’s chart offers clues to the stock’s pre-rally setting and how investors and traders can identify the next buying opportunity in the event of a pullback.

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

Spotify earnings data from MarketBeat shows the company reported profitability in the quarter ended September 2023; that was the first quarter with a profit since March 2022.

Focus on profitability

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

In the latest earnings report, Spotify CEO Daniel Ek addressed the company’s shift towards a focus on profitability.

“I know some of you may be starting to wonder if we are sacrificing growth for profitability,” he said. “Over the long term, we believe Spotify’s true value lies in solving problems at the intersection of creators and consumers. As we scale up, there will be even more opportunities to do this.”

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

Rivals with deep pockets

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

It competes in an arena full of heavy hitters, including mega-cap tech stocks Apple Inc. NASDAQ:AAPLAlphabet 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 has accelerated in each of the last five quarters.

This puts the company in a position to be competitive. However, when a relatively new public company enters a market with numerous rivals, especially those backed by large financial resources, it faces some formidable challenges.

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

Wall Street raises price targets

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

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

Additionally, the stock has taken a nose dive, returning 31.05% this year. The stock is ripe for some profit-taking before its next rally.

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

The number of active users is growing

In a Feb. 17 report, CFRA analyst Kenneth Leon wrote that Spotify is executing a strategy to bring in higher revenue and more monthly active users while aiming for profitability.

“We believe SPOT can grow profitably with gross margins in the upper 20% range,” Leon wrote. “We appreciate the attractive growth and stability of the music streaming market compared to the revolution seen in video streaming.”

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

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