Spotify (SPOT) received an upgrade from UBS Tuesday, with analysts noting they are increasingly convinced the company's profit margin expansion is "sustainable."
UBS analyst Batya Levi upgraded the stock to Buy from Neutral and also upped the price target to $274 a share from the prior $179. This suggests about 25% upsides compared to current levels.
"We think efficiency initiatives remain the focus and have increased conviction on sustainable margin expansion and stronger bottom line trends in the coming years," the analyst wrote.
"This, coupled with solid subscriber/monthly active user growth, a steady cadence of price increases and advertising growth, should lead to an improved EBITDA trajectory," he continued.
In the third quarter, Spotify turned a profit for the first time in over a year as its recent price hikes coupled with lower-than-expected costs related to personnel and marketing spend boosted its bottom line.
Overall, analysts have been bullish on Spotify after the audio giant pledged to improve its profitability beginning in 2023 on a gross margin and operating income basis.
"While investors have struggled in the past with valuation given lack of profitability, we expect SPOT to gain valuation support with EBITDA now firmly in positive territory and growth pegged against peers," Levi argued.
Spotify spent $1 billion pushing into the podcast market over the past four years with splashy A-list deals and $400 million-plus studio acquisitions.
That spending took a significant bite out of gross margins and weighed heavily on profitability. In response, Spotify committed to several rounds of layoffs, three in 2023 alone. The company also announced CFO Paul Vogel will step down from his position on March 31.
In addition to layoffs, Spotify raised prices, changed up its royalty structure, realigned its podcast division, and made audiobooks free to paying subscribers.
"We believe the company remains on track to achieve break-even in podcast in the first half of 2024, which should support an inflection in ad-supported segment margins," Levi wrote.
He forecast full-year 2024 margins for that segment to hit 12%, up 3% from last year.
The analyst added he expects margins to improve further in 2025 "as operating leverage in podcast proves out and the music segment benefits from new royalty deals with the labels."
Spotify reports earnings before the bell on Feb. 6. Shares have surged about 115% over the past year and are up more than 15% year to date.
Alexandra Canal is a Senior Reporter at Yahoo Finance. Follow her on Twitter @allie_canal, LinkedIn, and email her at alexandra.canal@yahoofinance.com.
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