Wolfe Research initiated coverage of Spotify (NYSE:) with an Outperform rating and a $390 price target in a note on Friday, with the new target representing a potential upside of 28%.
Analysts at Wolfe Research believe Spotify is undervalued, trading at 26x CY25E P/FCF, despite its greater exposure to the faster-growing streaming market than Universal Music Group (UMG).
The company notes that Spotify, which controls nearly a third of the global music streaming market, is more than twice the size of its closest competitors in the sector (Apple, Amazon and YouTube).
According to Wolfe Research, “Spotify operates at the epicenter of global audio consumption and discovery,” providing pure exposure to music streaming without the variance and risks associated with artist negotiations faced by music labels.
The company says this makes the company an attractive investment beyond just music, extending into higher growth sectors like podcasting, audiobooks and live audio.
Analysts at Wolfe Research see Spotify beating consensus estimates, driven by more frequent price adjustments and higher-margin segments. They estimate that by the fourth quarter of 2024, about 7% of Spotify’s revenue will be from branded segments, up from 3% in 2023 and zero in 2018. That shift is expected to push gross profit forecasts 4% above consensus in the second half of 2024.
Additionally, Wolfe Research highlights Spotify’s potential to grow its combined average revenue per user (ARPU), generating roughly three times the gross profit of other revenue streams. The firm expects regular price increases and growth in ancillary services to support this trajectory, and forecasts a nine-fold expansion in its total addressable market (TAM) by 2034.
Wolfe Research’s $390 price target for SPOT is based on discounted cash flow (DCF) and sum-of-the-parts (SOTP) valuation, which reflects steady user growth, low-single-digit ARPU growth, and significant free cash flow expansion.
The company expects to generate €45 billion in revenue, €16 billion in gross profit, and €48 in free cash flow per share by 2034, reinforcing Spotify’s strong long-term investment potential.