Spotify Technology (NYSE: SPOT) delivered its quarterly earnings before the market opened on April 29. Investors were hoping for a report that would approximate that of Netflix Inc. (NASDAQ: NFLX), which confirmed the bullish outlook for NFLX stock.
Spotify fell short of that. The report wasn’t bad by any means, but investors frequently hear what they want to hear. So when the company reported a slight miss in operating income and other numbers that met, but didn’t exceed the company’s guidance, the stock dropped over 8% immediately following the report.
However, in the days following, SPOT stock has recovered nearly all of that loss. That has investors wondering if the stock will push to a new all-time high. There’s good reason to believe it can.
The CEO Says Ignore the Noise
According to Spotify chief executive officer, Daniel Ek, there may be some short-term noise in the broader economy, However, Ek believes there’s nothing to make him be anything but bullish about the long-term outlook for Spotify.
In fact, Ek remarked that Spotify’s market continues to grow, and the company is taking a larger share of that market. Plus, the company is achieving that growth while raising prices.
That growth is reflected in some outstanding metrics such as
- 15% year-over-year (YoY) revenue growth
- 32% gross profit growth
- Monthly active users (MAUs) were up 10% YoY
- Premium subscribers were up 12% YoY
- Record free cash flow (FCF)
And remember that investors reacted to a slight miss on operating income. The other side of that story is that operating income increased by 203% in the quarter.
Freemium Can Cut Both Ways
[content-module:Forecast|NYSE: SPOT]Spotify’s streaming service is seen as being immune from tariff concerns and offers good value for consumers even in times of economic uncertainty. As Netflix has shown, consumers will accept ads at the right price. For Spotify users, that low price is free.
On the conference call, Ek remarked that this plan helps keep customers on the channel even in uncertain times. The company has made significant investments to upgrade its monetization capabilities for this category of users.
These investments include the Spotify Ad Exchange (SAX), which features a programmatic advertising model that streamlines ad buying with improved addressability and measurement tools. Spotify also enhanced Spotify Ads, its self-serve platform, including “Gen AI Ads,” which give advertisers access to AI-enhanced script and voiceover creation.
Those investments may be why investors were disappointed by a sequential drop in ad-supported revenue. But on closer inspection, investors saw that this category of revenue was up 8% year-over-year. Plus, the company’s ad-supported revenue generally increases in the company’s fourth quarter, which encompasses the holidays.
Analysts Paint a Mixed Picture
After bouncing back, SPOT stock is consolidating around the $600 mark. The takeaway is that, like many business services stocks, Spotify’s growth is maturing, which means investors and analysts are raising their expectations. That's particularly true for a stock that trades at over 100x earnings. Spotify is a commodity, and users will only pay a certain price for the service.
Since earnings, analyst sentiment has been mixed with lower and higher price targets. However, even the analysts who are lowering their targets still have a price target well above the consensus price of $606.71. That combination suggests a pullback from current levels is likely. However, such a lower move may allow investors to get in at a more attractive price.
Where Should You Invest $1,000 Right Now?
Before you make your next trade, you'll want to hear this.
MarketBeat keeps track of Wall Street's top-rated and best performing research analysts and the stocks they recommend to their clients on a daily basis.
Our team has identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market catches on... and none of the big name stocks were on the list.
They believe these five stocks are the five best companies for investors to buy now...
