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It’s time to jump back into the Spotify bandwagon, according to Wells Fargo. Analyst Steven Cahall upgraded the audio streaming stock to to overweight from equal weight, saying the company is now “off margin probation.” The upgrade comes a week following the company’s strong fourth-quarter earnings report . “When we upgraded SPOT to Equal Weight it was predicated on management showing progress against margin targets. Opex is demonstrating leverage as OI losses improve, and we think SPOT will be break-even in 1Q24,” analyst Steven Cahall wrote in a client note on Monday. “And, this is during an ad recession so podcasting is likely a bit behind. We see margins and valuation as upward bound with margin delivery rerating SPOT. We’re ahead of Street on gross and op margins for ’23-’25 (e.g. ’24 OM/GM 28%/2% vs Street 27%/-0.4%),” he added. An expected price hike could also further improve gross margins for Spotify’s Music division, according to Cahall. Continued expansion of the app’s Marketplace offerings will also play a critical role, the analyst said. Additionally, Spotify received an upgrade to overweight by Atlantic Equities, which is optimistic about the company’s gross margin expansion and advertising outlook. “We believe investors will be heartened to see non-music initiatives finally drive margin expansion and believe that industry Q4 results show that the ad market has now bottomed, driving improved confidence in estimates and multiple expansion,” wrote analyst Hamilton Faber in a Monday note. Nonetheless, both firms noted that Spotify is a difficult company to value. “The lack of meaningful profits, either EBITDA, operating income or free cash flow, leaves us with just two tools, namely revenue multiple and discounted cash flow analyses,” Faber said. He added, “Revenue multiples are not our preferred value metric as 1) they do not reflect company profitability and 2) essentially illustrate how expensive or not the company is versus historical levels rather than being a metric that can be compared against other businesses.” Wells Fargo set its price target to $180 from $121, which represents a 48.6% upside from the stock’s last closing price of $121.17. Atlantic Equities also increased its price target to $160, anticipating a rally of 32%. Spotify shares were up 2.7% on Monday before the bell. The stock has jumped 53.4% in 2023, as part of the tech stock rally . —CNBC’s Michael Bloom contributed to this report.
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