Spotify Technology stock climbed Wednesday after Wells Fargo said the music streaming platform could be more profitable than previously expected.
Analyst Steven Cahall upgraded his rating on Spotify SPOT +7.01% stock (ticker: SPOT) to Equal Weight from Underweight and increased his price target to $124 a share from $101.
Cahall said that the plans the company laid out during its investor day earlier this month, such as the discussions of margin improvement, were the reasons for the upgrade, but he needs more convincing to have a more bullish view.
Shares of Spotify were 6.5% higher Wednesday to $104.41, and were on pace for the largest percent increase since May 2022, according to Dow Jones Market Data. The stock has struggled this year, falling 56% in 2022.
“SPOT’s recent investor day laid out a more profitable company than we have modeled historically,” Cahall said in a research note. “Given the strength in user and revenue growth we’re willing to concede some margin expansion opportunity, and give management time to execute.”
For 2023, Cahall now expects gross profit margin to be 27.1%, up from previous estimates of 26.3%.
Gross margins in both music and podcasting should benefit from investments the company has made that “drive engagement and monetization,” Cahall said. Most of the margin improvement for Spotify will “come down to subscriber and revenue mix,” the analyst wrote. Spotify earns revenue from subscribers through streaming music, podcasts, and now audio books, as well as through ads.
“We could turn more bullish if the margin story really starts to shine through. On the other hand, if margin progress feels like it’s being pushed out then we may have to revisit our long-term outlook,” Cahall said.
Spotify was upgraded by Raymond James analyst Andrew Marok earlier this month to Outperform from Market Perform with a $150 price target, where he said the “stock is not broken” despite the recent selloff in the tech industry related to investor skepticism around the future of streaming.
Of the 21 analysts polled on FactSet , 12 have Buy ratings, nine have hold ratings and none have sell ratings on Spotify’s stock.
Write to Angela Palumbo at angela.palumbo@dowjones.com