Analyst Says Sell Spotify As Shares Are Too Expensive Right Now

Spotify Technology SA SPOT is the market leader in music streaming with 75 million premium subscribers, but without the same margins as video the stock looks expensive.

The Analyst

Loop Capital Markets analyst Alan Gould initiated coverage of Spotify with a Sell rating and $120 price target.

The Thesis

The music streaming industry grey 41 percent last year and is now the largest revenue component of the recorded music industry, and with Spotify as the leader it only seems natural to compare the company to video-streaming giant Netflix, Inc. NFLX.

Unfortunately, that’s where the comparisons seem to end for Gould.

“Spotify is renting a library and Netflix is building one,” the analyst said in a note. Whereas Netflix has its own exclusive content, Spotify’s library is mostly the same as its competition. The result is that Spotify lacks pricing power and its gross margins have lagged that of Netflix. Gould expects that, as the company grows, most of the economics will swing towards the record labels’ favor.

Spotify does stand to benefit from having the largest database of consumer listening data—so long as it can leverage it effectively ahead of the competition. Apple Inc. AAPL, Amazon.com, Inc. AMZN, and Alphabet Inc GOOG GOOGL each have their own streaming services backed by huge databases of consumer information and the resources of significantly larger companies.

Gould is also concerned by recent stock selling by Sony Corp (ADR) SNE and Warner Music. Sony has sold half of its original 5.7 percent stake since Spotify’s direct listing, while Warner has sold 75 percent.

Price Action

Shares of Spotify were trading down about 2.2 percent at $156.39 Tuesday morning.

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