Spotify Technology SA (NYSE:SPOT) rallied in early trading on Thursday, despite the company reporting lower-than-expected third-quarter earnings.
While the company's third-quarter results were solid, management guided to higher-than-expected fourth-quarter margins despite concerns about elevated investment from the rollout of new products, according to BofA Securities.
The Spotify Technology Analyst: Analyst Jessica Reif Ehrlich maintained a Buy rating and price target of $685.
The Spotify Technology Thesis: The company's revenue grew 16% year-on-year to €4.969 billion (around $5.58 billion), driven by 17% growth in Premium revenue and 10% growth in ad-supported revenue, Ehrlich said in a note.
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She added that Spotify Technology's gross profit grew 21% year-on-year and its gross margin was better than anticipated, "with revenue growth outpacing music costs net of marketplace programs."
Monthly active users (MAUs) stood at 788 million, driven by broad-based regional growth, the analyst stated.
Spotify's fourth-quarter guidance calls for gross margin and operating income "above our estimates," Ehrlich wrote. She noted that management projected:
- Revenue of €5.2 billion ($5.8 billion)
- Total MAUs of 818 million, versus BofA estimate of 822 million
- Premium subscribers reaching 316 million
- Gross margins of 33.8%
- Operating income of €820 million ($921 million)
Spotify's longer-term profit growth and free cash flow generation depends on:
- Deeper subscriber penetration
- Price hikes
- New pricing tiers
- Advertising improvement on digital initiatives
- New businesses