Spotify Is 'Leading A Crowded Field,' But Churn Remains A Concern

The leader in its industry, Spotify Technology SA SPOT's outlook is a balancing act between its strong brand strength and high Premium user churn rate.

The Analyst

Wells Fargo analyst Peter Stabler initiated coverage of Spotify with a Market Perform rating and $150 price target.

The Thesis

A survey conducted by Stabler revealed unaided brand awareness is second only to Pandora Media Inc P, with aided brand awareness even higher. Furthermore, 92 percent of Premium users and 79 percent of ad-supported users expressed satisfaction with the platform.

That high rate of satisfaction among ad-supported users may be Spotify’s greatest challenge moving forward. According to the same survey, free users, lapsed users and those who have never tried Spotify all self-reported limited interest in the paid service.

Stabler expressed concern that, although improving, the company’s churn rate is still high. He estimates that there are "tens of millions of users" who have dropped from Premium and are now satisfied by the ad-supported service.

Recent improvements to the free version may serve as a barrier to conversion, and ongoing churn could limit the success of subscriber acquisition efforts focused on the free version user population. For now at least, the company’s valuation appears full.

Price Action

Spotify shares traded near $161 Wednesday morning and were sitting around $159.80 at time of publication.

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