Spotify shares are up 8% after the announcement of a price hike. Should we buy them further?

Shares of music service Spotify rose nearly 8% after it announced it was raising subscription prices in a number of countries outside the US. Investors took this as a signal that the company is looking to increase its margins without risking losing its audience. Bernstein noted that Spotify has pricing power and advised buying the company's stock despite its recent report of a quarterly loss.

Shares of Swedish music streaming service Spotify rose nearly 8% in trading on Monday, August 4, after the company announced a price increase for Premium subscriptions in a number of countries outside the United States. At the peak, the securities were as high as $677 - recouping some of the losses they suffered after reporting on July 29.

Over the next month, users in South Asia, the Middle East, Africa, Europe, Latin America and Asia Pacific will receive emails with new subscription terms, the company said. Prices will vary by country, but the example cited in the statement said there will be a €1 increase to €11.99 (about $13.9) per month.

"We are increasing the price of Premium Individual to enable us to continue to innovate our product offerings and features," Spotify said. 

The price hike announcement followed a disappointing quarterly report last week in which Spotify reported a shift to a loss due to higher-than-expected employee compensation costs, writes Bloomberg.  

Spotify executives said the company is focused on "long-term, not short-term profits." Business director Alex Norström said Spotify raises prices "when it is justified from a business perspective" - in the last quarter this happened, for example, in France, Belgium, the Netherlands and Luxembourg.

"And I can inform you: in terms of user churn rates, we have not recorded anything unusual for Spotify," Norström emphasized.

Another Premium price hike was widely expected as the Swedish company seeks to improve its margins, writes Investors Business Daily. According to analysts, Spotify has market power and can increase subscription rates with minimal audience loss, the publication reports.  

"Ten years of contained pricing power and minimal user churn under past price increases continue to bolster our confidence in ARPU (average revenue per user) growth beyond the third quarter," Bernstein analyst Ian Moore was quoted by Investors Business Daily as saying.

Moore maintains an "outperform" rating on Spotify stock with a $840 target price. This implies a 34% upside to the stock price. 

Following the company's report, analysts at UBS maintained a "Buy" rating for Spotify shares and lowered their target price from $895 to $850. That still implies an upside of more than 35% from the closing price on Friday, August 1. For their part, analysts at Phillip Securities raised their rating on the company's stock from Reduce to Neutral and set a target price of $600 (4.5% downside potential).

About 62% of analysts who gave ratings to Spotify's stock advise investors to buy it (Buy and Overweight ratings). More than 30% are neutral with a Hold rating, while the remaining 7% suggest selling. Nevertheless, the Wall Street consensus target price of $638 on Spotify shares suggests they are down about 2% from their closing level on Friday, August 1st.

Last year, Spotify raised prices in the US twice: subscription prices there now start at $11.99 a month. In the second quarter, the number of subscribers increased by 12% year-on-year to 276 million: the company said it was "growing in all regions". The total number of monthly active Spotify users is 696 million.

The service has already demonstrated that it has an exceptionally loyal audience - many users have been building up their music and audio libraries for years, Bloomberg writes. Among all major video and audio services in the U.S., Spotify users are the least likely to unsubscribe, a report by research company Antenna published last year showed.

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