On Tuesday, Bank of America Securities analyst Jessica Reif Ehrlich maintained a Buy rating on Spotify Technology (NYSE:SPOT) with a price target of $700.
Reif Ehrlich noted that Spotify is at an inflection point in profitability and FCF, driven by deeper subscriber penetration, price increases, new pricing tiers, advertising improvement driven by digital initiatives, and new businesses like Audiobooks and Education.
The analyst is confident that Spotify’s first-quarter 2025 results will be at least in line with guidance on key metrics. This includes revenue, premium subscribers, and MAUs.
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Reif Ehrlich forecasted Q1 revenue of €4.21 billion ($4.5 billion). She also expected a gross margin of 31.5% (in line with the guide). Recent U.S. dollar strengthening could be a headwind to her current published first-quarter calendar 2025 revenue forecast.
Reif Ehrlich’s first-quarter operating income forecast of €488 million is below Spotify’s guidance of €548 million to account for social charges, given the rise in share price (about +20%) during the quarter.
The analyst noted that social charges and any FX headwinds do not indicate a slowdown in the business fundamentals, which she said remain strong.
Reif Ehrlich believes that Spotify’s subscription model should be more defensive and utility-like amid the current macro uncertainty.
Spotify had a robust year of gross margin expansion. So much so that Reif Ehrlich does not expect 2025 to replicate the magnitude of expansion seen in 2024.
The analyst currently projects gross margins to be sequentially flat to modestly decline in the second and third quarters. She predicts a return to expansion in the fourth quarter.
Notably, this margin outlook contemplates the recently announced renewal deals with several of the largest music labels.
Spotify has several levers for future growth, such as future pricing increases, new product launches, and programmatic advertising, the analyst added.
Price Action: Spotify stock is down 0.51% at $547.20 at last check Tuesday.
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