For Spotify's Stock, Raymond James Says 'Stream On'

Streaming music provider Spotify Technology SA SPOT is not only well positioned to double its subscriber base, but expand its gross margins and generate notable free cash flow.

The Analyst

Raymond James' Justin Patterson initiated coverage of Spotify with a Strong Buy rating and $190 price target.

The Thesis

Spotify is operating within the lucrative music industry that continues to shift from a transactional model to an on-demand streaming model, Patterson said in a note. As it stands the company is the clear global leader in streaming music given its presence in 65 countries, 75 million subscribers and 170 million active users.

Patterson thinks Spotify could grow to 150 million subscribers within the next two years. The bullish case for buying the stock is based on:

• Music industry revenue has risen 8 percent annually over the past few years with streaming "driving all the growth";
• Spotify can continue to expand its presence worldwide and can gain market share in existing market through deals like Family Plans;
• Spotify's 200 petabytes of data gives it a lead that would be difficult for any other company to "displace";
• Spotify boasts one of the best growth rates in all of technology;
• Subscriber growth over time should leverage marketing and fixed costs; and
• Over the longer term, free cash flow margins can total 14 to 15 percent.

Price Action

Shares of Spotify were trading lower by 4 percent Friday at $152.52.

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