Spotify Technology
is a key player in the music industry, but it faces competitive challenges, one analyst team said as it initiated coverage of the music-streaming platform ahead of earnings.
TD Cowen analysts Doug Creutz and Mei Lun Quach initiated coverage of Spotify stock (ticker: SPOT) at Market Perform with a price target of $129 in a Monday report. Shares of Spotify were down 1.4% to $147.88 in premarket Monday trading, and the price target implies about13% downside from that. Coming into Monday’s session, Spotify shares have gained 90% so far this year.
“While we expect Spotify to continue to grow revenue at double digits and enjoy margin improvement over time, we think current valuation already discounts in a fairly optimistic financial trajectory,” TD Cowen analysts wrote.
Music has gotten a refresh since streaming entered the picture, part of which can be traced to “Spotify’s consumer-friendly model,” analysts continued.
In the past, entertainment platforms have carved a space through exclusive content, but within the music sphere, almost all of the content is owned by record labels, they added.
“This means it is difficult for direct service providers to differentiate; to a certain extent, Apple/Amazon/Google have their larger platform installed base to fall back on, whereas Spotify does not,” TD Cowen explained. “This is a big reason why Spotify has invested so heavily in technology and podcasting content; we think that Spotify will likely have to continue to invest heavily in its business to overcome these structural disadvantages.”
The company has presented multiple profitability targets including 30% music gross margin in the intermediate term, and 35% in the long term, analysts wrote. Investors will be keeping a close eye on these metrics and others when the company reports third-quarter earnings on Tuesday. A majority of analysts are bullish on Spotify stock, with 56% rating it at Buy, and 44% at Neutral, according to FactSet.
Apple
stock (AAPL) is 0.9% lower in premarket trading,
Amazon.com
stock (AMZN) is 0.7% lower, and shares of
Alphabet
(GOOGL), the parent of Google, are down 0.5%.
Write to Emily Dattilo at [email protected]
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