Spotify’s stock bounced upward again on Thursday, thanks to optimistic comments from Guggenheim analyst Michael Morris.
Spotify’s renegotiations with the major labels will significantly improve the company’s gross margins, according to a note issued this week by Morris. The contract updates — which will also reportedly involve re-ups with Merlin — could shave Spotify’s royalty obligations by 2% when calculated against total revenues.
That’s a meaningful drop, and one that could further assist Spotify towards its broader gross margin goals. According to industry intel, Spotify will have to renegotiate with the ‘big three’ plus indie powerhouse Merlin during the latter part of 2019.
“Importantly, we see Spotify as well positioned for continued gross margin improvement as the company renegotiates its record label agreements in 2019,” Morris penned. “Specifically, we forecast that Spotify is positioned to reduce rights payments as a percentage of revenue by 2.0% in 2019 as it pursues long-term gross margins of 30% to 35% (gross margin has been 24.5% over the past four quarters).”
The optimistic opinion boosted Spotify’s stock past $184 on Thursday, a 2.36 point (1.3%) gain. That’s part of a broader ascent, with Wall Street insiders like Morris expecting healthy terms from major label heavyweights.
Perhaps most importantly, Morris significantly upped his price target on Spotify to $210 from $175. The analyst reiterated his buy rating.
Aside from stronger free cash flow, the Guggenheim analyst also sees continued subscriber strength. Currently, Spotify is past 83 million paying subscribers, though industry debate is now focused on how much higher that will go. Morris expects “a continuation of usage-trend growth” based on third-party data, despite heavy growth by Apple Music.
Sounds perfectly bullish, with $210 representing a theoretical all-time high. Back in April, Morris likened Spotify to Netflix, noting that the streaming music platform “evokes a Netflix-like promise of significant global penetration potential.”
“Spotify seeks to deliver maximum listening enjoyment to consumers through convenience, curation, breadth of content, and payment options (your time or money),” Morris noted. “The value proposition to the artist is to strengthen the listener relationship through distribution, data access, and compensation.
“Spotify’s focus on creating a virtuous cycle for consumers and artists and using technology to create curated experiences evokes a Netflix-like promise of significant global penetration potential.”