Spotify stock (SPOT) lost steam early Wednesday after rising about 2% in premarket trading following a fresh upgrade on Wall Street.
Wolfe Research analyst Zach Morrisey, who took over coverage for Spotify, upgraded shares to Outperform from Peer Perform, citing a path for top-line revenue acceleration, continued margin expansion, and potential upside to current Wall Street estimates over the next 12 months.
Morrisey assigned a $190 price target on the stock, implying roughly 20% upside to current levels.
Spotify shares are up nearly 100% year-to-date and have soared more than 50% over the past year. The stock was down more than 2% in late morning trading, mirroring the broader markets.
"While upcoming price increase[s] and gross margin expansion is somewhat appreciated at current levels, our incremental work on the company’s opportunities in the cost side makes us more comfortable about the potential operating margin trajectory over the next few quarters," Morrisey wrote in a note to clients.
The analyst added positive trends in subscribers and monthly active users (MAUs) build on confident sentiment the platform has not yet reached peak market saturation. Spotify reported 515 million MAUs in its latest quarter — the company's largest-ever first quarter growth of the metric.
Furthermore, "the willingness by other competitors to raise prices (above SPOT’s levels) signals a rational ecosystem," Morrisey continued, maintaining Spotify's business should exhibit "better resiliency" in a weakening macro environment.
Analysts, overall, have been bullish on Spotify after the audio giant pledged to improve its profitability rates beginning in 2023 on a gross margin and operating income basis.
The company, which categorized 2022 as a peak investment year, spent $1 billion pushing into the podcast market over the past four years with splashy A-list deals and $400 million-plus studio acquisitions.
That spending took a significant bite out of gross margins and weighed heavily on profitability. Investors punished the company as a result, with the stock down a whopping 70% in 2022.
Flash forward to today, however, and the company seems to be fulfilling that profitability promise. It has committed to various cost-cutting initiatives over the past year, which have included layoffs and a realignment of its podcast division.
On Tuesday, Spotify announced a weekly podcast deal with comedian Trevor Noah, days after the company said it was parting ways with Prince Harry and Meghan Markle.
Earlier this month, the audio giant announced it would be eliminating 200 jobs, or 2% of its workforce, within its podcast unit. The company cut 6% of its workforce, or about 600 employees, earlier this year.
"The company has recently shifted its focus to improve gross and operating margins through cost efficiencies," Morrisey wrote. "While there has been some progress YTD, we see further room to optimize the cost structure and significantly accelerate the path to profitability by [full-year 2024.]"
"We expect the magnitude of savings from headcount reductions, podcast content investments, and marketing spend should drive upside to Street OI estimates in the coming quarters," he said.
As Spotify looks to further improve margins, Bloomberg reported on Tuesday the audio giant plans to roll out a more expensive, premium subscription tier that will feature improved audio capabilities and more access to audiobooks. This comes as investors have pushed the company to hike prices across its various plans.
The reported tier, dubbed "Supremium" internally, will launch internationally before debuting in US markets by October, Bloomberg said.
In a statement, a Spotify Spokesperson told Yahoo Finance, "We are constantly iterating and ideating to improve our product offering and offer value to users. But we don’t comment on speculation around possible new features and do not have anything new to share at this time."
Alexandra Canal is a Senior Reporter at Yahoo Finance. Follow her on Twitter @allie_canal, LinkedIn, and email her at [email protected]
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