AI Integration And Audiobooks Expansion Will Boost User Engagement

Key Takeaways

• Expansion into audiobooks and AI-enhanced music discovery are set to boost user engagement and revenue growth.
  
• Improved monetization strategies and innovative advertising solutions could enhance margins and diversify earnings sources.
  
• Spotify's reliance on advertising and cost efficiency faces challenges from market volatility, competitive pricing pressures, and macroeconomic factors affecting revenue growth and profitability.

Catalysts

Provides audio streaming subscription services worldwide.

• Expansion into audiobooks and new subscription tiers is likely to drive future revenue growth as these initiatives expand Spotify's offerings and user engagement.
  
• Integration of AI and transformative technological shifts in music discovery are expected to enhance user engagement and retention, potentially increasing overall earnings.
  
• Continued focus on monetization strategies like price increases and ARPU growth are likely to improve net margins by optimizing revenue per user.
  
• Record gross margins and operating income driven by favorable content costs indicate potential for sustained improvement in net margins and earnings.
  
• Development of new advertising solutions, including programmatic capabilities through Spotify's ad exchange, could diversify ad revenue sources and increase advertising earnings in the long term.

Spotify Technology Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Spotify Technology's revenue will grow by 14.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.6% today to 10.7% in 3 years time.
• Analysts expect earnings to reach €2.4 billion (and earnings per share of €12.2) by about December 2027, up from €701.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €2.8 billion in earnings, and the most bearish expecting €1.9 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 48.2x on those 2027 earnings, down from 131.1x today. This future PE is greater than the current PE for the US Entertainment industry at 16.1x.
• Analysts expect the number of shares outstanding to decline by 0.7% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.35%, as per the Simply Wall St company report.

Spotify Technology Future Earnings Per Share Growth

Risks

• The advertising revenue grew only 7% year-on-year in constant currency terms, reflecting volatility in market spending on brand-related campaigns, which may impact future revenue growth given the reliance on advertising as part of their business model.
  
• Currency exchange rate movements created a larger-than-expected headwind, impacting Spotify's financial outlook by approximately €80 million in the fourth quarter, which could pressure overall revenues and net margins.
  
• The focus on cost efficiency amidst a macroeconomic shift suggests potential risks in balancing growth and profitability, especially if economic conditions worsen, which could impact operating income.
  
• Concerns about pricing in relation to industry movements indicate that while Spotify is a leader in some markets, competitive pressures and consumer price sensitivity might constrain future revenue from price increases.
  
• Growth in their ad-supported model, crucial for scaling, is uncertain and dependent on developing their programmatic offerings, which might delay advertising revenue acceleration relative to peers and impact earnings.

Valuation

• The analysts have a consensus price target of €477.12 for Spotify Technology based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €611.45, and the most bearish reporting a price target of just €235.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be €22.5 billion, earnings will come to €2.4 billion, and it would be trading on a PE ratio of 48.2x, assuming you use a discount rate of 7.4%.
• Given the current share price of €476.91, the analyst's price target of €477.12 is 0.0% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.