A Spotify Sell-Side Roundup: Wall Street Largely Bullish On Streaming Platform's Stock

The quiet period for streaming music provider Spotify Technology SA SPOT expired Monday, which means all research firms are permitted to publish reports on the stock. Here's what the Street is saying.  

The Analysts

• Evercore ISI's Anthony DiClemente initiated coverage of Spotify's stock with an Outperform rating and $190 price target.
• Morgan Stanley's Benjamin Swinburne initiated coverage of Spotify's stock with an Overweight rating and $190 price target.
• Goldman Sachs' Heath Terry initiated coverage of Spotify's stock with a Buy rating and $190 price target.
• JPMorgan's Doug Anmuth initiated coverage of Spotify's stock with an Overweight rating and $190 price target.
• The Buckingham Research Group's Matthew Harrigan initiated coverage of Spotify's stock with a Neutral rating and $175 price target.

Evercore ISI

Spotify is the market leader in streaming music and deserves credit for "revitalizing the broader record industry," DiClemente said in the initiation note. Spotify boasts 80 percent more subscribers than its closest rival, and its ongoing leadership position should enable the company to do the following, the analyst said:

• Generate more favorable terms with content owners.
• Leverage the vast amount of user data it collects to create high-margin ancillary revenue streams.
• Expand vertically so it can own and distribute differentiated content.

Morgan Stanley

As a whole, the subscription streaming market grew by over 100 million users globally — and Spotify contributed 40 percent of that growth, Swinburne said in a note. Encouragingly, Spotify's subscriber base of 70 million could nearly triple to around 200 million users by 2022 given the following, the analyst said:

• A total addressable market of 1.3 billion smartphone users across the 65 countries where Spotify operates.
• Per capita spending on music is "still a fraction" of its 1990s peak.

Related Link: Spotify's Value To Consumers Earns It A Bullish Rating From Stifel

Goldman Sachs

Spotify is faced with "challenging" economics, as around 65 percent of its total revenue is allocated toward labels and publishers, and heavy investments in marketing and technology are needed to maintain its leadership, Terry said in the initiation note. The risk-reward profile for the stock remains favorable, as Spotify's shares are trading at just over 3x sales versus comparable peers that trade at 5x on average, the analyst said. 

JPMorgan

One of Spotify's biggest advantages over rival streaming music providers is its "freemium" model, Anmuth said in the initiation note. Spotify has 92 million ad-supported monthly active users, and its freemium model can scale quickly, he said.

The streaming platform's scale will continue attracting artists and advertisers, increase its leverage in negotiations with labels and help drive growth in premium users, the analyst said. 

Spotify's stock is trading at a 3.7x multiple on EV/revenue estimates for 2019, which represents a discount to streaming video and music peers that trade at an average multiple of 4.7x, Anmuth said. Over time, Spotify will warrant a higher multiple as its margins expand, he said. JPMorgan's $190 price target is based on a 4.5x 2019E EV/revenue multiple.

Buckingham

Spotify offers consumers a "great product," but the same can't be said for the stock, Harrigan said in the initiation note. The bullish case for owning Spotify's stock is based on the company showing growth metrics above expectations — a task that will prove to be difficult, the analyst said. Buckingham is modeling the company's five-year sales growth rate at 26.3 percent, at the very low end of the company's five-year sales growth guidance of 25-35 percent.

Price Action

Spotify shares were up 2.9 percent Wednesday afternoon at $169.63. 

Related Link:

Spotify's First-Ever Guidance, Explained