Spotify Stock Isn’t Turning Heads, But Analysts Say It’s Only a Matter of Time

Even though Spotify stock (NYSE: SPOT) was down 3.7% last week after being downgraded by Evercore ISI analyst Kevin Rippey, financial watchers expect it to be a blockbuster one day.

Rippey, in his critique, wrote that “we simply do not see a path by which Spotify can generate the level of gross profit demanded by Street estimates over the medium-term. Consumers enjoy streaming music, and there’s little content differentiation between platforms.”

He argued that Spotify might see smaller-than-expected upside from newer initiatives like paid promotions and podcasts. He lowered his price target on the shares to $110 from $125.

For context, Spotify’s stock has gained 31% so far this year, up from a rate of growth of 20% last year. The number of users, on average, continues to rise. At the end of the March quarter, it was a total of 217 million, up 26% from the prior-year period. 

The question is what it must do to keep in investors’ good graces.

For Now, the Road is Paved with Subscription Numbers

According to TheStreet’s Tiernan Ray, user growth is everything. On Wednesday, he wrote: “as long as Spotify can keep bringing in users, their service is perceived as a relatively stable operation that will produce meaningful cash flow at some point in the future. That hardly sounds like a scintillating business, but in internet terms, that’s success.”

And TheStreet’s Jon Markman is of a similar belief, especially on Spotify’s competitive position: “Spotify is doing a spectacular job of integrating music with video, biography and the explanation of lyrics, an effort that feels genuine and valuable in a way its larger, less focused rivals can’t match.”

“I suspect Spotify can break out of its current narrow range and trade toward $300 in the next few years as recognition of its scalable, profitable model grows,” he wrote.

Spotify’s podcast initiatives over the last few months have led analysts to elevate their outlook for its advertising revenue, says a research team at Guggenheim Partners led by Michael Morris.

Podcast advertising revenue increased by 54% last year to $479 million, and could grow to as much as $1 billion by 2021, according to Guggenheim. If Spotify can capture 25% of that market, in-line with current estimates, it would generate an additional $250 million in annual revenue, the firm estimates.

Spotify IPO on April 3, 2018: What to Know

  • Shares closed at $149.60, up 12 percent from a reference price of $132
  • In a Reuters testimony, shares slid due to a lack of confidence in Spotify‚Äôs business model
  • Spotify is the biggest company to go public by direct listing on the NYSE.