Spotify Technology's (NYSE: SPOT) shares rallied solidly in 2023, and the rally is gaining momentum in 2024. The Q4 results reveal most metrics trending at or near record levels and looking favorable going into the year. The news affirms a recent upgrade by UBS, which predicts steady margin improvements over the next few years. In their view, the combination of pricing increases, MAU growth, a focus on efficiency, and growth in the ad channels add up to a much higher share price for this tech stock.
UBS Group’s new price target for the NYSE-listed shares is $274. That’s not the highest on Wall Street, but it's close and compounded by other favorable revisions in January 2024. Marketbeat.com tracks four revisions, including UBS, and all come with a price target upgrade. The range runs from $195 to $280, from consensus to near the highest on record, with an average of $252.
That target is more than 20% above the consensus. The consensus target is below the current price action and may present a headwind for the market, but it is trending higher and up 55% YOY. Based on the strength of the Q4 results and outlook, it is highly likely this trend will continue to support the rebound in the price action. Regardless, a move to the $252 level puts the market at a two-year high and above the next critical resistance target.
Spotify has an unblemished Q4 and guides favorably
SpotifyTechnology had a solid quarter with strength in every metric. The company reported €3.7 billion in revenue, a gain of 16% compared to last year. This is 300 basis points better than the analysts' average forecast and an acceleration of growth sequentially and YOY. The gains are driven by market-beating net and premium net additions, up 23% and 15%, respectively. Ad-supported subs are up 28% on double-digit growth in all regions. The EU remains the company’s largest segment, growing by 28%, but the rest of the world is leading. The company added five new markets in the quarter; this region should remain strong in 2024.
The margin news is among the most favorable in the report. The company expanded its gross margin by 140 bps to 26.7%, including start-up costs for the audiobook business. Expenses were flat despite the company’s growth, resulting in a better-than-expected GAAP operating loss and a surge in cash flow and FCF. Adjusted operating income more than doubled to €68 million.
The guidance is also favorable. The company expects a slowdown in growth aligning with the analysts' outlook, but it is less than forecasted and compounded by margin strength. For the current quarter ending in March, Spotify said it expects revenue in the range of $3.88 billion. This forecast includes a 2.5% FX conversion headwind and may be cautious, given advancements made in Q4 and 2023. Among them is the lean into audiobooks and a new merchant hub. The hub allows artists to sell branded items, including t-shirts, mugs, and vinyl albums, opening another revenue stream for both.
Spotify cash flow and balance sheet are trending in the right direction
Spotify generated $396 million in FCF flow for the period, allowing it to sustain a solid balance sheet and build shareholder equity. Shareholder equity is up 5% YOY and should continue to improve in 2024. Operating income for Q1 is forecast at €180 million, reversing a loss in Q1 2022 and nearly tripling the Q4 adjusted operating income.
The chart and price action reflect Spotify's business's strength and momentum. The market is up 7% in premarket trading, extending the 2023/2024 rally to 200%. The move above another critical resistance point further confirms the reversal in play. Assuming the market follows through on the signals given, this stock should continue to rally in 2024 and may reclaim the $300 level before mid-year.
