Spotify Stock Rises After Upgrade. The Case for Buying Before Earnings.

Spotify stock has gained 54% this year. (Photograph by Chris Ratcliffe/Bloomberg)

Spotify Technology stock was rising Thursday after Oppenheimer upgraded shares of the music-streaming company, saying it is confident there is even more room for growth ahead.

Analyst Jason Helfstein raised his call on the stock to Outperform from Perform and set a target of $800 for the price. That implies a 19% increase from its closing level of $674.46 on Wednesday.

“We believe that SPOT will benefit from the secular tailwind of
growing digital audio streaming adoption and that the company’s
subscription economics are better than most believe,” Helfstein wrote in a research note on Thursday.

Spotify stock has outperformed the broader market this year, climbing 54% compared with the S&P 500’s 8.5% rise. Positive investor sentiment has been supported by strong numbers of premium subscriber and monthly active users, even in a time of economic uncertainty. Even though consumers are worried that tariffs will increase the prices of everyday goods, they are still willing to pay for music, podcasts, and audiobooks.

“There’s a lot of uncertainty in the world, and when volatility rises, it’s natural to ask who might be affected and how. And from where I sit, Spotify is faring better than most,” CEO Daniel Ek said on the most recent earnings call, in April.

Still, shares have declined 10% in July and are on pace for their worst month since September 2022, according to Dow Jones Market Data. The stock has now dropped 11% from its record closing high of $775.90 on June 26.

Spotify issued a disappointing forecast about its monthly active users figures when it reported first-quarter earnings in April. Plus, shares are trading at 55.8 times the earnings expected over the next 12 months, compared with 22 times for the S&P 500.

The recent decline means now is a great time for investors to buy, Helfstein wrote, adding he sees “many tailwinds ahead.” For one, while Spotify’s main competition is Apple and Amazon.com, Helfstein believes that those companies have “minimal incentive to invest in platform improvements.” Spotify continues to invest in growth, which could help improve its competitive positioning.

Helfstein also wrote that the company has more avenues to increase revenue growth, including the potential to charge about $1 a month for people who are now listening to the free ad-supported tier. Netflix charges users less per month for its ad-tier service than its traditional subscription, which has been a successful business shift for the streaming company.

“For years SPOT has meaningfully under-monetized its free tier, using this as a conversion funnel, as the company tries to scale advertising,” Helfstein wrote. “Over time, we expect SPOT to solve advertising or resort to a low fee (~$1.35/month), despite management plans to maintain a free tier.”

Shares of Spotify were up 1.5% to $684.69 on Thursday. The company is expected to report its second-quarter financial results on Tuesday.

Write to Angela Palumbo at angela.palumbo@dowjones.com