A Cruel Summer Leaves Spotify Stock on Uncertain Path

Spotify Technology stock (NYSE: SPOT) has been struggling as competition closes in on the incredibly popular worldwide music streaming platform that set the music industry on fire only last year.

Spotify leads globally in total paying subscribers, but it is faced off with tech heavyweights Apple, Amazon and Alphabet, Google’s owner, over who can best protect margins in a subscription game with untested limits.

The nascent music streaming market isn’t at all volatile right now, but there is a lot riding on Spotify’s back. Shares have tumbled since the Stockholm-based company reported disappointing second-quarter subscriber numbers on July 31.

In August, Spotify extended its free-trial period from one month to three and a move into podcasting drew restrained applause from analysts wondering if the strategy would be enough to drive profitability from the pure-play music streaming platform.

As the stock market has shown, SPOT shares are down 29% in the past eight weeks. Now, however, analysts are starting to grow more bullish on the stock because they think the stock has fallen far enough and could click higher, or at least stand its ground in the weeks ahead. But the company has the financial world waiting.

When Spotify went public April 3, 2018, it attracted a lot of interest, and not just because the company was already well known to the public. Instead of hiring underwriters to sell new shares to the public, Spotify went public on the NYSE in what is called a “direct listing.” Meaning it didn’t sell new shares. Roughly 90 percent of the shares were immediately available to trade.

It was a bold move, creating an audience of wide-eyed speculators from the start.

This week Credit Suisse analyst Brian Russo upgraded Spotify to Neutral from Underperform. But that doesn’t mean he’s excited about the company’s prospects.

“Our forecast and longer-term thesis remain unchanged, and we continue to believe Spotify will be challenged to meet street expectations for subscriber revenue growth given a reliance on both penetrating older consumers in developed markets and lower-value consumers in emerging markets,” Russo wrote.

Chart: SPOT July-Present 2019

A Wall Street analyst who had been bearish on Spotify has called a bottom on SPOT stock, but with a dash of measure.

Evercore ISI analyst Kevin Rippey on Tuesday upgraded Spotify stock to in line from underperform but kept his price target at 110. He said the risk/reward on the stock is “increasingly balanced.”

“Our bearish view of Spotify and June downgrade had been grounded in the notion that when the stock was trading at about $150, the market was taking an overly optimistic view of the company’s ability to drive gross margin improvement,” Rippey said in a note to clients.

He added, “while we still contend that the path to substantial gross margin expansion for SPOT is unclear, with the stock down over 30% from recent highs, the opportunity related to shorting SPOT has diminished.”

Spotify stock could remain under pressure as the market re-evaluates companies showing attractive revenue growth that are beset by unclear paths to meaningful profitability, he says.

Despite upgrading SPOT stock to the equivalent of a neutral rating, Rippey is skeptical about the company’s prospects. Spotify is a pure play in a business that is a loss leader for heavily diversified tech leaders like Amazon and Apple, according to Rippey.

Still, SPOT appears technically oversold for now, he says.

Spotify is expected to share its Q3 2019 financial results and letter to shareholders on Monday, October 28th before market opens.

What to Know: Spotify’s Direct Listing IPO

  • SPOT opened at $165.90 a share on April 3, 2018, giving it a $29.5 billion valuation based on the 178,112,840 ordinary shares outstanding
  • Spotify’s direct listing is different from IPOs because the company is both listing and offering shares at the same time without banks’ help
  • Spotify said it allows the company to list without selling shares and allow the market to set the price of shares.

Published by: Charles Ederer

Charles is Streaming Week's editor and publisher. A former Silicon Valley marketing executive, he writes about the intersection of business strategy and music-streaming innovation.

Categories Featured, Financial