What Happened
Commenting on the development, KeyBanc Capital Markets analyst Justin Patterson reiterated an Overweight rating and a $148 price target for Spotify shares.Audiobooks could be immaterial to Spotify’s performance into the year-end and likely in 2023, too, Patterson said in a note.
Citing reasons for the deduction, the analyst said the revenue model for audiobooks is entirely transactional at launch. Secondly, it will take meaningful audiobook sales to move the needle, Patterson added.
The analyst currently estimates audiobook sales of over two million units in the fourth quarter. This would add only less than 20 basis points to gross margin percentage, he added.
Spotify’s entry prices are competitive against smaller platforms, slightly more expensive than Amazon Inc.’s Audible and well above Apple Inc. and Alphabet Inc., Patterson noted.
“Our view is Spotify will adjust pricing and its model as it learns more from initial user behavior,” he said.
As the company improves discovery and selection and refines its model over the medium term, the analyst sees an opportunity for the gross margin to exceed 40 percent and lift consolidated gross margin into the low- to mid-30 percent range.
“We continue to find risk/reward compelling, with shares trading at 1.1x 2023E EV/S,” he added.
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