Analysts Not Worried About Spotify, Say 2020 Will Be An Investment Year

Spotify Technology SA (NYSE: SPOT) shares began climbing back Thursday after falling a day earlier following earnings disappointment, and sell-side analysts remained mostly positive on the company's overall outlook and pushed price targets higher.

Benzinga · 02/06/2020 17:11

Spotify Technology SA (NYSE: SPOT) shares began climbing back Thursday after falling a day earlier following earnings disappointment, and sell-side analysts remained mostly positive on the company's overall outlook and pushed price targets higher.

Spotify was off about 6% on Wednesday after the music streaming leader reported weaker-than-expected fourth-quarter earnings and forecast slower premium subscriber growth in 2020.

The Spotify Analysts

Wells Fargo's Steven Cahall maintained an Underweight rating and raised the price target from $122 to $126.

Credit Suisse analyst Brian Russo remained Neutral on Spotify with a $125 price target.

Morgan Stanley's Benjamin Swinburne kept an Overweight rating and $180 target price.

Nomura Instinet's Mark Kelley kept a Buy rating and $180 price target.

The Spotify Theses

Sell-side analysts remain convinced that in the long run, music streaming is a growth business and early entrant Spotify is a market leader.

"Over time that scale translates into substantial earnings power," Swinburne said in a note.

And, several analysts said, 2020 will be an investment year.

Kelley acknowledged the weak quarter and outlook, but said user trends were strong, including the best premium subscriber net-add quarter ever. Also, Kelley noted, monthly active users accelerated again across Europe, North America and Latin America.

But analysts are also starting to hear a subtle change in the tune Spotify is playing. The company showed its hand on its intention to boost podcasting with its announcement Wednesday it had acquired The Ringer, which has a network of podcasts.

This year will be one of evolution for Spotify, "from a primarily music service to a more multi-pronged business included podcasting and the Two-Sided Marketplace," or helping artists find way to monetize connections with listeners, wrote Cahall. "Podcasting is a major investment initiative and SPOT believes it increases customer lifetime value, though this year it’s contributing to gross margin pressure."

Russo referred to management's assertion that podcasting increases conversion and lowers churn, and that Spotify has seen increases in users listening to podcasts, and growing listening time.

"We see podcasts mainly as a potential driver of subscriber growth," Russo said.

In addition to the acquisition of The Ringer, Spotify also had positive news in subscriber growth, which came in ahead of expectations in the fourth quarter, but Russo noted there's a question over the sustainability of subscription growth, "where we note ’20 guidance implies net adds have peaked."

SPOT Price Action

Spotify shares were up 2.6% Thursday, trading at $150.79.

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