Spotify trading close to median target estimate
Out of 27 analysts covering Spotify (SPOT), 17 recommend a “buy,” seven recommend a “hold,” and three recommend a “sell.” Analysts have a 12-month median target estimate of $152.25, which means that the stock is trading at a discount of 1.5% from its current price.
Revenue and earnings growth
Analysts expect Spotify’s sales to grow by 29.4% year-over-year to $7.68 billion in fiscal 2019 and 23.7% to $9.5 billion in 2020. Spotify is still posting a non-GAAP (generally accepted accounting principles) loss and Wall Street estimates its bottom line to improve in the coming years.
Spotify’s earnings before interest, tax, depreciation, and amortization (or EBITDA) are expected to improve from -$141 million in 2019 to $145 million in 2021. Operating profit is also set to improve from -$210 million to $39.4 million in the same period.
Spotify might also be non-GAAP profitable by the end of 2021 with a net margin of 0.50%. While earnings might fall -257.1% to -$1.75 per share in 2019, they might improve by 65.7% in 2020. Earnings per share are estimated to rise at a compound annual growth rate of 28.2% in the next five years.
Spotify will need to grow user base
The key driver for Spotify’s revenue growth is the company’s ability to grow its subscriber user base. At the end of the first quarter, Spotify’s monthly active users were 217 million, while paid subscribers were around 100 million.
Spotify is facing competition in the music streaming space from the world’s largest company. Spotify has around 26 million subscribers in the United States, which is below Apple Music’s (AAPL) 28 million subscribers. Spotify remains the worldwide leader, as it also has a free tier that generates revenue via advertising.
Overall, Apple Music has around 56 million subscribers. Both Apple and Spotify have subscription partnerships with telecom carriers. Apple Music has partnered with Verizon (VZ), while Spotify has partnered with Sprint (S).