Spotify Technology (NYSE: SPOT) has been making waves in the stock market after reporting impressive earnings last week. The company saw a 14% increase in paying subscribers, a 19% growth in monthly active users, and a 20% rise in revenue year over year. What’s even more impressive is that Spotify turned a profit of $1.05 per share in the first quarter of 2024, a significant improvement from a loss a year ago.
Deutsche Bank has given Spotify the highest price target on Wall Street, setting it at $400 a share and urging investors to buy the stock. The key factor behind this recommendation is Spotify’s rising gross profit margins, which hit 27.6% in Q1. Management aims to reach a 30% gross profit margin between 2025 and 2027, and the Q1 results suggest that this goal may be achievable sooner than expected.
However, despite the optimism surrounding Spotify, some analysts believe that the stock may be overvalued. Using a standard PEG ratio approach to valuation, it is estimated that Spotify should be earning around $10.52 per share to justify a $400 share price. With Spotify currently earning $1.05 per share in Q1, it falls significantly short of this target.
While some analysts remain bullish on Spotify’s future prospects, others caution that the stock may be inflated at its current levels. As investors weigh the potential risks and rewards of investing in Spotify, the debate over whether the stock is a buy continues.