Video Podcasts And Audiobooks Will Increase User Engagement And Retention

Key Takeaways

• Spotify's diverse pricing and product innovations, like video podcasts and super fan tiers, aim to boost user engagement, subscriber growth, and profitability.
  
• Strategic partnerships and programmatic advertising expansion are expected to enhance content offerings and advertising revenues, supporting long-term growth and competitive margins.
  
• Slow transition to programmatic advertising, competition, and potential inefficiencies pose risks to revenue and profitability amid expansion and pricing challenges.

Catalysts

Provides audio streaming subscription services worldwide.

• Spotify's introduction of new product innovations, such as video podcasts and audiobooks, is aimed at boosting user engagement and retention, which could lead to increased revenue and subscriber growth.
  
• The company plans to prioritize accelerated execution in 2025, focusing on quickly shipping product improvements and expanding music-related experiences, likely enhancing revenue and operating margins.
  
• Spotify's strategy to introduce more diverse pricing tiers and specialized user experiences, including a potential super fan tier, aims to optimize Average Revenue Per User (ARPU) and drive subscriber growth and profitability.
  
• Expansion of programmatic and automated advertising sales initiatives is expected to boost advertising revenue as these efforts get scaled in 2025 and beyond.
  
• The continued development of strategic partnerships, such as agreements with Universal Music Group, might enhance Spotify's ability to offer varied and unique content, supporting revenue growth and maintaining competitive gross margins.

Spotify Technology Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Spotify Technology's revenue will grow by 14.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.3% today to 14.3% in 3 years time.
• Analysts expect earnings to reach €3.4 billion (and earnings per share of €16.35) by about March 2028, up from €1.1 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €4.1 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 49.8x on those 2028 earnings, down from 93.6x today. This future PE is greater than the current PE for the US Entertainment industry at 26.0x.
• 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 7.89%, as per the Simply Wall St company report.

Spotify Technology Future Earnings Per Share Growth

Risks

• The transition to programmatic advertising is behind schedule, which could lead to slower-than-expected revenue growth from advertising, impacting overall earnings.
  
• The focus on expanding video and Education offerings could face execution challenges and require increased investment, potentially affecting net margins if these investments don't yield the desired consumer adoption or monetization.
  
• The emphasis on accelerated execution may strain resources and lead to operational inefficiencies, impacting overall profitability and operating income if the pace outstrips the company’s capacity to effectively manage these changes.
  
• Subscribers' resistance to price increases in inflationary environments could affect subscription growth, particularly if Spotify's pricing strategy doesn't align with perceived value, potentially impacting revenue.
  
• The persistent and increasing competition in key markets, including developing regions, may pressurize Spotify's ability to maintain its revenue streams and market share, affecting long-term revenue growth.

Valuation

• The analysts have a consensus price target of $673.059 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 $763.59, and the most bearish reporting a price target of just $444.96.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €23.8 billion, earnings will come to €3.4 billion, and it would be trading on a PE ratio of 49.8x, assuming you use a discount rate of 7.9%.
• Given the current share price of $569.48, the analyst price target of $673.06 is 15.4% 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.