Deutsche Bank analyst Benjamin Black upgraded Spotify Technology SA
The analyst is more optimistic due to outperforming top-of-funnel metrics, 3Q gross margin guide beating consensus, and narrowed operating losses.
ARPU was down 3% YoY FXN due to a product mix shift, but Black expects ARPU to improve from 3Q onward with pricing as a growth driver.
Advertising on music and podcasting sides improved in 2Q and continues in 3Q.
Black estimates the price increase will drive about 40bps of gross margin improvement from leverage on streaming delivery costs. He raised revenue and operating income estimates for FY24.
The deceleration of FXN ARPU growth is due to the success of multi-tier account additions, with promo campaigns initially dilutive to ARPU.
The outcome of label negotiations may be visible starting in 4Q.
Beyond 3Q, there are potential catalysts like a HiFi tier launch, a new audiobook monetization model, scaling advertising growth, and launching high-margin verticals like ticketing.
2Q Premium subscribers beat guidance, with the promotional campaign as the main driver. Premium ARPU is slightly below expectations due to a mix shift to multi-user accounts.
The announced price increase will likely have a ~6% favorable impact on overall ARPU, leading to a rise in the 4Q23 premium ARPU estimate.
Ad-supported side recorded 15% YoY FXN growth, driven by podcast ad revenue growth and music ad revenue improvement.
3Q23 and FY23 revenue estimates increase by 1%, 3Q gross margin forecast increases ~10bps, and 3Q operating income estimate increases by €12 million.
FY23 operating income forecast decreased due to higher write-downs and increased FX headwinds.
Price action: SPOT shares traded higher by 5.05% at $147.48 on the last check Wednesday.
