Spotify Technology SA (NYSE:SPOT) has reached an inflection point after returning to operating income profitability in the third quarter, analysts at the Bank of America (BoA) believe.
The music streaming platform reported strong third quarter results, topping expectations for revenue, profit, monthly active users and premium subscribers.
“Shares of SPOT increased over 10% following 3Q results largely due to the solid results as well as management commentary regarding the inflection of profits, now expected to be sustained, as well as improving gross margins, free cash flow and room for future price increases,” the analysts highlighted in a note to clients.
Spotify shares pared their gains on Wednesday, trading at US$163.80 shortly before noon.
The BoA analysts reiterated their ‘Buy’ rating for Spotify stock and raised their price target from US$185 to US$203 based on their updated discounted cash flow model which accounts for the 3Q inflection in operating income and improving free cash flow trajectory.
The analysts expect Spotify’s momentum to continue in the fourth quarter and fiscal 2024, notably with 4Q to include the full impact of recently announced price increases.
“We remain bullish on the long-term potential of SPOT, which should benefit from an improvement in advertising and deeper penetration in existing markets,” they wrote.
“Furthermore, price increases as well as management's recent commentary and actions on expenses should drive continued improvement in the underlying margin trajectory of the business.”
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