Spotify Could See Trouble In Label Renegotiations, Engagement Efforts

With 18 Buy ratings, five Holds and just one Sell, Spotify Technology SA SPOT has a lot of Street support. Oppenheimer just can’t get on board.

The Rating

Analysts Jason Helfstein and Alex Brondolo initiated coverage on Spotify with a Perform rating.

The Thesis

Oppenheimer sees positive subscription economics offset by limited and diminishing opportunity to drive engagement through adaptive recommendation technology. At the same time, the ability to improve gross margins through label renegotiations is expected to fade.

“We believe that SPOT will benefit from the secular tailwind of growing digital music streaming adoption and the company’s subscription economics are better than most believe,” Helfstein and Brondolo wrote in a Monday note. “However, we question the extent to which Spotify can differentiate its service to maintain market share and leverage its position in the music industry to increase gross margins over time.”

Unfortunately for Spotify, the analysts’ bull case depends on the uncertain factors.

By Oppenheimer’s calculations, the stock’s intrinsic value rests between $160 and $170 per share. They anticipate $4.4 billion in gross profit by 2022 supported by 473 million monthly active users and 213 million subscribers.

“However, we see SPOT losing share over time; [the] ability of competitors to cross-sell streaming services to large existing subscriber base (Prime, iOS, YT MAU) represents large growth advantage,” the analysts wrote.

Price Action

Shares closed Tuesday up 1.7 percent at $180.43.

Related Links:

Spotify Hires TV Producer Dawn Ostroff: What It Means For Investors

Deutsche Bank Holds Spotify, But Names 4 Ways It Could Turn Bullish On The Streaming Service