Citi saw the potential for Spotify stock to rise 30%. Why is he expecting a reversal?

Citi raised its recommendation on the securities of music streaming service Spotify from neutral to buy, despite their sharp decline over the past six months, writes CNBC. At the same time, the bank kept its target price at $650, which implies a potential upside of almost 29% from the closing level of trading on January 29.

According to analyst Jason Bazinet, the company's valuation looks much more attractive after the stock has fallen nearly 36% from its 52-week high reached in June. He said the drop was not due to fundamentals, but to a rotation of capital out of technology stocks that looked more immune to counter risks - such as duties, artificial intelligence-related risks and recession fears - at the start of 2025.

"As these risks have eased, investors have begun to exit second-tier technology stocks, which has led to the recent compression in multiples at companies like Spotify," he said.

Basinet sees a number of positive signals for the stock: potential price increases from both Spotify and its competitors, accelerated share repurchases, and improved gross margins in the advertising model.

Speaking about Spotify's pricing, Bazinet noted that price increases in some EU countries have been more moderate compared to other regions. That said, AI-powered features - such as AI-DJs and personalized playlists - have yet to launch in many of these EU countries, CNBC notes. It believes Spotify is intentionally "preserving AI features" to use them to support future price increases.

In addition, Bazinet pointed out that where Spotify has already raised prices, competitors have not. If rivals do follow suit and raise prices, Spotify's stock would react positively, in his estimation, as the company would be able to maintain market share with higher margins. However, if competitors don't raise prices, the analyst believes this would be a risk to the stock price.

"If competitors among music streaming services (Digital Service Providers (DSPs) don't raise prices, we believe investors will be concerned that Spotify won't be able to significantly raise prices further. And this, in turn, could cause the market to worry about gross margin compression," he said.

On January 27, MoffettNathanson initiated coverage on Spotify with a recommendation to hold its stock in a portfolio and a target price of $487. This implies a 3.4% drop in quotes relative to the closing price on January 29.

Earlier, Goldman Sachs raised its recommendation on the company's securities from neutral to buy and adjusted the target price from $735 to $700. This target assumes the potential growth of the securities by almost 40%.

Of the 41 analysts covering the streaming service's securities, the majority - 34 - advise buying them. Six recommend keeping the shares in the portfolio and only one recommends selling them.

This article was AI-translated and verified by a human editor