Spotify Delivers Solid Q3 Results; Updates Guidance

Spotify (SPOT) delivered upbeat third-quarter results characterized by growth across all the major metrics. Monthly active users (MAU), revenue, and gross margin came in better than expected. The company also benefited from significant advertising strength as engagement levels across all markets improved. SPOT shares rose 8.3% to close at $273.13 on October 27.

Spotify offers audio streaming services worldwide. Its Premium segment offers unlimited online and offline streaming access, while the Ad-Supported segment offers on-demand online access to a catalog of music and unlimited online access.

Revenue was up 27% year-over-year and 7% up sequentially to €2.5 billion. Additionally, it came in at the top end of the guidance range, impacted by significant advertising activity in the quarter. Premium revenue was up 22% year-over-year to €2.18 billion as Ad-supported revenue grew 75% year-over-year to €323 million.

Gross margin landed at 26.7%, above the top end of guidance, and reflected a 200 basis point expansion year-over-year. The increase was due to a favorable revenue mix shift towards podcasts, marketplace activity, improved music advertising operating leverage, and Other Cost of Revenue efficiencies. (See Top Smart Score Stocks on TipRanks)

Spotify’s total monthly active users were up 19% year-over-year to 381 million. The company registered double-digit growth across all regions. Premium subscribers increased by 19% to 172 million, up from 165 million in the last quarter.

Spotify expects total monthly active users to range between 400 and 407 million in the fourth quarter. Premium subscribers, on the other hand, should range between 177 and 181 million, with total revenue expected between €2.54 – €2.68 billion. The gross margin is expected between 25.1 – 26.1%, with an operating profit/loss of €(152) – €(72) million.

Yesterday, Pivotal Research Group analyst Jeffrey Wlodarczak reiterated a Buy rating on the stock with a $385 price target, implying 40.96% upside potential to current levels. According to the analyst, SPOT shares are very attractive after an impressive Q3 report characterized by solid MAU results and a solid outlook.

Consensus among analysts is a Moderate Buy based on 8 Buys, 4 Holds, and 2 Sells. The average Spotify price target of $289.07 implies 5.84% upside potential to current levels.

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