Morgan Stanley: Spotify Technology SA (SPOT.UN) The Golden Road - Reiterate Overweight
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Morgan Stanley reiterated an Overweight rating on Spotify while lowering its price target from $650 to $630, based on roughly 30x 2027 free cash flow. The firm expects Spotify to surpass 300 million paid subscribers and 800 million monthly active users this year, with gross margins reaching the mid-30% range by next year.
Concerns regarding Tencent Music's slowdown caused by Soda Music competition should not be directly extrapolated to Spotify, given structural differences between the Chinese and Western music markets. Additionally, AI music generators like Suno are viewed as complementary rather than competitive, as Spotify provides a scaled platform with highly engaged users and superior monetization capabilities.
The upcoming Investor Day in mid-May, the first in four years, could serve as a positive catalyst to refine the AI narrative. Morgan Stanley projects a 2025-2028 EBIT CAGR of approximately 35% and an FCF CAGR of around 20%. The current trading valuation represents about 22x 2027 FCF, offering over 30% upside potential.
Despite slightly higher near-term operating expenses driving the target reduction, the risk-reward profile remains highly attractive. YouTube Premium and Music price increases also bode well for industry structure. Risks include AI and UGC content competition, weakened pricing power, and operating expenses exceeding expectations.