Spotify is climbing ahead of earnings

source
Markets Insider

Spotify was up 2.66% and climbing ahead of its first earnings report as a public company, due out after Wednesday’s closing bell.

The freshly public company is expected to report a first-quarter loss of $0.31 a share on revenue of $1.14 billion, according to analysts surveyed by Bloomberg. In 2017, Spotify lost $5 billion on revenues of $1.5 billion.

Negative cash flow and hefty accumulated losses have Wall Street worried about the longevity of Spotify as it fights to claim its stake in the “global addressable market“‘ for music streaming, especially as a majority of its revenue goes to paying royalties on the content it offers.

“We do not have sufficient confidence that [Spotify] will generate excess returns on capital over the next 10 years,” Morningstar analyst Ali Mogharabi wrote. He has a “fair value estimate” of $118 – 30% below where the stock opened Wednesday.

“Spotify has continued to generate cash from operations since 2016; although the firm has incurred hefty operating losses in recent years, Spotify’s cash flow has been better as a good portion of these costs, which are accrued fees to rights holders, have not yet been paid out in cash,” he said.

Wall Street on the whole remains more optimistic, with a price target of $174.

Morgan Stanley, which led Spotify’s direct offering last month on the New York Stock Exchange, says shares could reach $190 in the next year, as other revenue increases to offset royalty payments.

“The current modest gross margins for Spotify are not an impediment to healthy and growing free-cash-clot generation,” Morgan Stanley analyst Ben Swinburne wrote earlier this week. “Over time, Spotify will need to improve gross margins, primarily from driving advertising and other ancillary revenues not tied to label content.”

Shares of Spotify are up about 2% since opening for trading at $165.90 on April 3.

Check back here Wednesday afternoon for Spotify’s first quarter earnings results.