On Friday, Morgan Stanley lowered its price target for Spotify shares from $300 to $225 to reflect “higher interest rates and lower long-term gross margins,” analysts wrote in a note to investors. The analysts kept the “overweight” rating for Spotify, however, since the current $141.28 price suggests ample room for growth.
Morgan Stanley is “optimistic” on Spotify’s ability to “deliver strong user growth through innovation and product development” but “cautious” on its goal to achieve gross margins in the 30-40% range. The analysts believe Spotify has the ability to raise prices to improve average revenue per user and view Amazon Music’s recent price hikes “as constructive for the broader industry.” Spotify has raised some prices on select, multi-person subscription plans in a small number of markets with “no meaningful impacts to churn or customer intake,” the company said in Feb. 2021 and reiterated in October. It may reveal more details of its roadmap during its investor day presentation on a yet-to-be-announced date in the second quarter.
Spotify shares were flat on Friday, bringing their weekly and year-to-date losses to 8.1% and 39.6%, respectively. Spotify and other tech stocks have fallen sharply since mid-December in anticipation of the Federal Reserve’s interest rate hike on March 16. Companies “that lack near-term profits like Spotify” experienced “meaningful, multiple compression [of share price],” the analysts wrote. There’s room for improvement, according to Morgan Stanley: Based on the current share price, Spotify shares have a 59.3% upside even with a $75 lower price target.