PhillipCapital is initiating a “buy” recommendation on audio streaming platform Spotify with a target price of US$117.00 as analyst Jonathan Woo likes it for its growing base and pricing power that is expected to drive future revenue growth.
Spotify has consistently seen growth in both its revenue and user base, as it more than trebled from FY2016 ended December 2016 to FY2021.
The platform’s premium revenue, which drives over 90% of revenue growth, has grown about 22% y-o-y in 2QFY2022 to EUR2.5 billion ($3.5 billion), leveraging from the conversion of monthly active users (MAUs) into premium subscribers.
Woo has also noticed that Spotify is the leader in the global streaming market, with currently a 31% market share, and boasts the largest library of audio content across formats like music, podcasts and audiobooks. The industry, he reckons, is expected to increase at a 9% CAGR until FY2025.
“We expect the company’s continued ability to convert existing MAUs into premium subscribers through its engaging content, coupled with increasing subscription prices – as demonstrated by rising average revenue per user (ARPU) (6%y y-o-y), to drive revenue growth of about 54% over the next two years,” says Woo.
As the group’s premium monthly subscription translates to a steady recurring revenue, Woo has also noticed that premium revenue has grown over the last five years at a 26% CAGR, largely due to a 130 million jump in subscribers.
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“With churn levels improving y-o-y, premium revenue continues to be a base of resilient revenue generation for Spotify, even amidst a weaker macroeconomic environment this year,” says Woo.
Spotify’s ARPU saw an inflexion point in 1QFY2021 and has since been steadily improving at 5% to 6% y-o-y, as a result of increasing subscription prices, which Woo expects will continue trending upwards.
“Spotify’s ability to add subscribers and incrementally raise prices at the same time should allow the company to expand their resilient base of premium revenue further,” adds the analyst.
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Meanwhile, gross margins as at FY2021 stood at 27%, increasing about 1.5% y-o-y, with management reiterating its goal of achieving 35% to 40% gross margins in the near future as revenue per listening hour continues to outpace cost per listening hour.
Additionally, Spotify remains focused on growing its higher-margin ad revenue (12.5% of revenue), expanding its non-music content – podcast and audiobooks, to create more ad-placement opportunities for advertisers. “We expect this focus on growing ad revenue to help overall margin expansion moving forward,” says Woo.
Shares in Spotify closed at US$94.63 on Oct 4, 6.33% higher for the day, but 61.2% lower year-to-date.
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