Could Spotify's Stock Benefit From A Tencent Music IPO?

The massive IPO that Tencent Music is reportedly pursuing benefits Spotify Technology SA SPOT's valuation by validating streaming services, according to Buckingham Research Group.

The Analyst

Aanalyst Matthew Harrigan maintains a Neutral rating on Spotify with a $175 price target.

The Thesis

A U.S. IPO of China’s Tencent Music Group, expected to raise roughly $25 billion, could reinforce investor interest in music streaming, Harrigan said in a Wednesday note.

Spotify has a 9-percent stake in the company after a reciprocal share exchange in December — a smart move by Spotify, which may have already doubled its investment through the exchange and does not operate in China, the analyst said.

“Per the financial press, Tencent Music's valuation could be up as much as 2x from its $12.3-billion share swap deal valuation to $25 billion. This would be worth another $5-plus per share to Spotify.”

Tencent music controls over 70 percent of the Chinese music streaming market with over 700 million monthly active users, but generates only $480 million in sales in China. Paid customers comprise only 10 percent of the user base. The average revenue per user per month is roughly $2, according to Buckingham.

Concerns and competition for Spotify are found in the form of Apple Inc. AAPL, where CEO Tim Cook just announced that Apple Music now has 50 million users, up from the 40 million announced in April.

Buckingham Research forecast that Spotify will grow its global streaming market share from 42 percent in 2016 to 53 percent in 2022, and to 58 percent in 2025.

“We also assume that global music streaming grows at an 18-percent CAGR through 2025 to near $41 billion. We have premium users growing 24 percent annually through 2022 to reach 205 million, and 19 percent annually through 2025 to 282 million,” Harrigan said.