The music industry’s transition to a streaming model could be a major long-term opportunity for investors. Unfortunately for Spotify Technology (ticker: SPOT) shareholders, analysts say monetizing that growth will be an uphill battle for Spotify.
Spotify bulls argue that the company is in a position to follow in the footsteps of Netflix ( NFLX), which has been one of the top-performing stocks of the past decade by establishing a dominant market share in streaming video. Deutsche Bank analyst Lloyd Walmsley says Spotify is no Netflix.
“We are bullish on the music industry but struggle with the bull case on Spotify given its lack of content differentiation or visibility around long-term margins,” Walmsley says.
[See: Take Note of These 8 Music Stocks.]
Walmsley says Spotify would need to demonstrate significant progress on a number of different fronts before its stock is appealing to long-term investors.
First, Spotify would need to grow its market share significantly. Statista reported in June 2017 that Spotify held roughly 36 percent of streaming music market share compared to 17 percent share for Apple ( AAPL) and 10 percent for Amazon.com ( AMZN). However, the Wall Street Journal reported in February that Apple Music is growing at twice the pace of Spotify, suggesting Spotify is losing share, not gaining it.
In April, Apple confirmed it now has 40 million Apple Music subscribers, up from 30 million in September of last year. At its estimated 5 percent growth rate, Apple Music could surpass Spotify’s 70 million subscribers before the end of summer.
Walmsley also says Spotify needs to emulate Netflix’s focus on original content and provide customers unique music that can differentiate its service. One way to accomplish this goal is to diversify its library away from major record labels.
If Spotify isn’t able to either gain market share or create a differentiated library of content, Walmsley says the stock would need a major pullback to be a value for investors.
In the meantime, Walmsley says there are better options out there for music investors.
“We would rather play the music streaming tailwinds through major labels (e.g. buy-rated Vivendi) that will benefit from success across streaming platforms and as music listening shifts from broadcast radio to streaming platforms,” Walmsley says.
[See: 6 Reasons to Love Apple Stock in 2018.]
Deutsche Bank has a “hold”rating and $155 price target for SPOT stock, suggesting 12 percent downside from recent levels.
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Spotify Technology (SPOT) Stock Is Missing the Beat originally appeared on usnews.com
