Spotify (SPOT) analysts are more bullish on the stock after the company revealed this week it crossed 500 million monthly active users (MAUs) and detailed key changes to its user interface during its second-ever Stream On event.
Truist analyst Matthew Thornton, who maintained his Buy rating and $132 price target on the stock, wrote in a note to clients Thursday the surge in MAUs was the "big incremental" news for investors.
Spotify had previously guided to 500 million MAUs for the first quarter after reporting 489 million MAUs in the fourth quarter.
Coupled with user growth metrics, Spotify also unveiled a new mobile interface that "gives listeners a more active role in the audio discovery process and gives creators more space to share their work."
Similar to TikTok and YouTube Shorts, Spotify users will be able to endlessly scroll through video content that recommends certain artists, podcasts, and audiobooks. However, Spotify CEO Daniel Ek emphasized the changes are not meant to imitate other platforms, but rather enhance its own.
"I don't want people to think that we're making this to be like TikTok," Ek said in an interview with CBS on Thursday. "We're making it to be a much more interactive Spotify."
'Past the peak drag'
The news comes as the company looks to take advantage of its hefty podcast investments, which have been a significant drag on margins and profitability.
To date, Spotify has spent $1 billion pushing into the podcast market, signing on celebrities like the Obamas, Prince Harry, and a Kardashian. The company paid $230 million to acquire podcast studio Gimlet in 2019. Spotify then paid a reported $200 million to bring Joe Rogan exclusively to the platform, and another $200 million for The Ringer in 2020.
Spotify CFO Paul Vogel said during the company's investor day the platform will look to improve its rates of profitability beginning in 2023 on a gross margin and operating income basis, categorizing 2022 as a "peak investment year." Earlier this year, the company announced a reorganization focused on "efficiency" and laid off 6% of its workforce.
Analysts seem encouraged by the updates with JPMorgan analyst Doug Anmuth writing in a note published on Wednesday: "We continue to believe SPOT is now past the peak drag from podcast investments in content & creation platforms/tools, & should increasingly reap the benefits of those investments w/podcasts turning profitable in late 2023 or 2024 & Marketplace contribution ramping."
The analyst, who maintained his Outperform rating and $135 price target, said he's "bullish" on the platform's strategy, explaining his positive view is driven by three main catalysts:
1) Spotify could have 635M users, including 277M Premium subs, in 2025; 2) Spotify has a differentiated freemium model at scale and is ramping up paid subscriptions; and 3) investments in podcasts and Two-Sided Marketplace have the potential to drive margin leverage and engagement over the long term.
Anmuth also predicted price increases are on the horizon following recent hikes at both Apple Music (AAPL) and YouTube Premium (GOOGL): "A price increase to the Individual plan in the U.S. is likely in the coming months, which we estimate could drive ~€200M in incremental annualized Revenue."
'You have to live in the future'
Spotify called the overhaul to its home feed and search experience "our biggest evolution yet," noting the rollout will happen in stages over the coming weeks and months.
"We've found that the next generation of listeners craves better ways to sample audio before fully diving in," the company said in a blog post. "So get ready for a more active experience with advanced recommendations, a spotlight on visual canvases, and a completely new and interactive design—all to make discovering new audio easier than ever before and help introduce users to their next favorite artist, podcast, or book."
Additionally, the company provided more details on its AI-powered DJ, which curates song recommendations for premium users, in addition to Smart Shuffle, which makes personalized suggestions to user-generated playlists.
"You have to live in the future and for me, the future is always the young people. What are they doing in various cultures?" Ek said. "Every few years in the industry someone brings something out from a design perspective that's just [a] much, much better way for people to interact with it."
The redesigned app experience includes personalized subfeeds for music, podcasts & shows, and audiobooks. Users can then save, download, or share recommendations, play from the start, or explore even more related audio.
JPM's Anmuth said the changes better position Spotify's place in the global audio market and "should ultimately strengthen user acquisition, engagement, & retention."
Raymond James analyst Andrew Marok added in a note on Thursday the announcements "showcase how Spotify is leveraging their listener data and AI capabilities to provide creators with the broadest possible audiences across Spotify’s audio modalities."
"While likely not immediately accretive to the financials, we think [Wednesday's] announcements will make the platform an even more attractive venue for creators, and could potentially provide more ammunition for the company in negotiations with labels in terms of value-add."
Marok maintained his Outperform rating and price target of $130 a share.
Alexandra Canal is a Senior Entertainment and Media Reporter at Yahoo Finance. Follow her on Twitter @alliecanal8193 and email her at alexandra.canal@yahoofinance.com
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