Spotify Technology SA (NYSE: SPOT) traded higher by 1 percent on Monday after a number of Wall Street analysts weighed in on the newly-public stock following the expiration its initial public offering analyst quiet period.
Perhaps the most bullish commentary came from J.P. Morgan, which drew a close comparison between Spotify and top market performer Netflix, Inc. ( NFLX).
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After opening at $165.90 on its first day of trading on April 3, Spotify stock has cooled off, finishing Monday’s session under $162.
According to J.P. Morgan analyst Doug Anmuth, concerns about Spotify’s lack of profitability are all-too-familiar for early Netflix investors.
“We believe Netflix is the closest operating comp to Spotify, as both benefit from the secular shift to streaming through subscription based models,” Anmuth says. He says both Spotify and Netflix have plenty of room to increase their penetration rates in their respective markets, and Spotify and Netflix both have extremely impressive user growth rates that will help drive gross margin expansion.
Anmuth estimates that Spotify will increase its user numbers at a compound annual rate of 28 percent from 2017 to 2021 and improve its gross margins by 11 percent in that time. Still, Anmuth says Spotify will face some unique challenges.
“Without creating its own content, Spotify can generate better [free-cash-flow] than Netflix in the near term, but it will likely have lower long-term margins and overall profit will be driven more by subscriber volume,” he says.
Goldman Sachs analyst Heath Terry says Spotify has key advantages over competitors in scale, content and technology.
“While current economics are challenging with 65 percent of revenues going to labels and publishers and investments in marketing and technology needed to maintain its lead, we believe the value of Spotify’s platform from its audience, its data, and opportunities for growth is significant,” Terry says.
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Morgan Stanley analyst Benjamin Swinburne estimates Spotify can grow its user base from 70 million to 200 million by 2022 and says the potential upside in the stock outweighs the downside.
“Spotify is the market leader in subscription streaming, with growing user engagement, and we believe scale brings an opportunity for ancillary revenues including podcasts and artist/label tools,” Swinburne says.
J.P. Morgan has an “overweight” rating, Goldman Sachs has a “buy” rating, and Morgan Stanley has an “overweight” rating for Spotify. All three firms have $190 price targets for SPOT stock.
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Investors Hope Spotify Technology SA (SPOT) Can Be Another Netflix originally appeared on usnews.com
