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Spotify's Path to Sales Growth Reacceleration, Margin Expansion Should Drive Stock Higher, Morgan Stanley Says

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Spotify's Path to Sales Growth Reacceleration, Margin Expansion Should Drive Stock Higher, Morgan Stanley Says

Spotify Technology's (SPOT) shares should move higher, driven by factors such as its path to a reacceleration in revenue growth and margin expansion, Morgan Stanley said in a note e-mailed Monday.

The brokerage expects features including audiobooks, video podcasts, and generative artificial intelligence mixing tools to highlight product innovation and support long-term margin expansion at the audio-streaming platform, as user engagement deepens.

"We think the path to revenue growth reacceleration and margin expansion, along with catalysts on the come around additional label deals beyond (Universal Music Group) on the AI tools should drive shares higher," Morgan Stanley said in the note to clients. "Disclosed adoption and engagement data across podcasts, video, and audiobooks reinforce our view that success can continue -- and support (the company's) ability to turn that into improved pricing power and margin improvement, over time."

In May, Spotify signed licensing agreements with Universal Music Group for fan-made remixes. The company also detailed its targets through 2030, including delivering a mid-teens revenue compounded annual growth rate, a gross margin between 35% and 40%, and an operating margin above 20%.

Last month, Apple's (AAPL) music streaming service raised subscription prices globally, marking its first hike since October 2022. Morgan Stanley said the move helps overall industry structure and provides a favorable pricing umbrella for Spotify. In February, the audio-streaming platform raised premium monthly subscription prices to $12.99 from $11.99.

"Our credit card panel data shows less churn this price hike cycle than the prior two, underscoring product innovation and increased value perception," Morgan Stanley said.

The brokerage raised its price target on the Spotify stock to $640 from $610 while maintaining an overweight rating, saying the stock's risk/reward profile is "compelling."

The company's New York Stock Exchange-listed shares were down 2.1% in Monday late-afternoon trade and have fallen nearly 16% so far this year. Spotify is scheduled to report its second-quarter earnings Tuesday.

Morgan Stanley projects Spotify to match guidance with more than 6 million Premium subscriber net additions in the quarter before accelerating to 6.5 million in the third quarter.

Price: $491.30, Change: $-8.64, Percent Change: -1.73%

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