Spotify initiated at HSBC with Buy rating on growth outlook

Spotify Technology (NYSE:SPOT) shares rose 2% premarket on Wednesday after HSBC started coverage with a Buy rating, noting the company screens well against peers given its strong growth outlook.

The firm has set a $310 price target on the shares.

Spotify has established itself as the music streaming market leader and with an active user base of 602M, it is well positioned to capture the opportunity beyond music, said a team of analysts led by Joseph Thomas.

The analysts added that the cross-sell from music to podcasts/audiobooks looks like a strategy built on firm ground. Revenue in full-year 2023 of €13B ($14.5B) is a fraction of the $170B market opportunity by 2030 that it sees across music, podcasts and audiobooks.

This opportunity does not end here as Spotify is now experimenting education courses, and other verticals are yet to be announced. The analysts also see the potential opportunity from other revenue streams such as merchandising and ticket sales.

Thomas and his team noted that the Luxembourg-based music streaming platform is on the cusp of profitability.

"Spotify has historically been loss making but recent restructuring, alongside improved podcast profitability, should help to move it to an operating profit in 2024. From here, we see significant potential for margins to move upwards as mix shifts away from music towards higher margin verticals and as Spotify’s promotional business continues to quickly expand," Thomas and his team said in the research note.

A comparison with media peers suggests the company could get close to reaching its long-term EBIT margin target of 20%, but it will need to successfully expand beyond music in order to do so, according to HSBC.

The analysts also see the potential for outperformance. They pitch their forecasts towards the upper end of consensus expectations as they see the potential for Spotify's new audiobook proposition to steer growth together with improving ad-monetization.

There could be additional outperformance if Spotify hits its aspirational long-term target growth run-rate, as both HSBC and consensus forecasts are pitched conservatively against this, Thomas noted.

Beyond 2026, there is significant potential upside if Spotify executes well against these long-term targets (by 2032) of $100B sales and a 20% EBIT margin, according to the analysts.

In addition, HSBC noted that Spotify screens well versus media peers given its strong growth outlook and relatively low EV per user.

Spotify (SPOT) has a Hold rating at Seeking Alpha's Quant Rating system, which consistently beats the market. The Seeking Alpha authors' average rating is also Hold but the average Wall Street analysts' rating is more positive with a Buy rating.