Latin America And Asia Pacific Will Unlock Global Opportunities

Key Takeaways

• Subscriber growth in emerging markets like Latin America and Asia Pacific positions Spotify for continued revenue expansion and greater market share.
  
• Focus on AI, new monetization systems, and scaling of product features could enhance user engagement, operating margins, and revenue growth.
  
• Spotify's growth faces challenges from macroeconomic uncertainty, operational inefficiencies, external reliance, and value alignment, straining margins and potentially affecting long-term revenue.

Catalysts

Provides audio streaming subscription services worldwide.

• Spotify's subscriber growth has exceeded expectations, particularly in emerging markets like Latin America and Asia Pacific. This positions the company for continued revenue growth as they capture market share in these regions.
  
• The company is focusing on rapidly scaling new product features, such as audiobooks and video podcasts, which enhance user engagement and could lead to increased revenue and improved net margins through new monetization opportunities.
  
• Spotify's ads business is starting to show positive effects from new automated features, providing advertisers with more flexibility and aiding in higher revenue growth, potentially improving earnings as ad sales expand.
  
• The strategic focus on AI and machine learning to enhance user personalization and internal efficiencies suggests potential improvements to product velocity and operating margins.
  
• Expansion into new monetization systems, such as the Spotify Partner Program for video podcasters, indicates ongoing innovation that could boost revenue and earnings by expanding monetization avenues and increasing user engagement.

Spotify Technology Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Spotify Technology's revenue will grow by 16.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.3% today to 13.7% in 3 years time.
• Analysts expect earnings to reach €3.4 billion (and earnings per share of €16.2) by about May 2028, up from €1.1 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €3.9 billion in earnings, and the most bearish expecting €2.3 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 48.0x on those 2028 earnings, down from 91.2x today. This future PE is greater than the current PE for the US Entertainment industry at 23.5x.
• Analysts expect the number of shares outstanding to grow by 2.41% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.2%, as per the Simply Wall St company report.

Spotify Technology Future Earnings Per Share Growth

Risks

• Spotify identifies macroeconomic uncertainty as a potential risk, which could impact its engagement metrics and overall long-term revenue growth.
  
• Continuous investment and expansion in new initiatives like video podcasts and audiobooks could strain operating margins if these new ventures don't deliver expected returns promptly.
  
• The company's focus on accelerated execution and innovation to scale across multiple partner devices adds complexity and may lead to unforeseen operational inefficiencies, impacting profitability.
  
• Heavy reliance on external partnerships and industry alignment, especially in pricing and new product tier launches, could limit Spotify's agility and affect revenue growth timelines.
  
• While Spotify sees value in its subscription model, significant increases in market share and future growth could be challenged if price increases don't align with consumer perceived value, potentially affecting subscriber retention and long-term revenue.

Valuation

• The analysts have a consensus price target of $666.485 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 $799.66, and the most bearish reporting a price target of just $459.18.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €24.7 billion, earnings will come to €3.4 billion, and it would be trading on a PE ratio of 48.0x, assuming you use a discount rate of 8.2%.
  
• Given the current share price of $576.94, the analyst price target of $666.48 is 13.4% higher.
  
• 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.