Analyst: Spotify Is A Great Product, But Not A Great Stock At This Valuation

Streaming music provider Spotify Technology SA SPOT offers consumers a "great product," but the same can't be said for the stock at its current valuation, according to Buckingham.

The Analyst

Buckingham Research's Matthew Harrigan initiated coverage of Spotify's stock with a Neutral rating and $175 price target.

The Thesis

Spotify deserves credit for rejuvenating the global music business after two decades worth of dollar sales declines, Harrigan said in a note. This alone isn't sufficient to warrant a bullish stance on the stock as the company needs to generate growth beyond current expectations. Specifically, the company's own guidance for a five-year sales growth rate of 25 to 35 percent, which compares to 26.3 percent the analyst is modeling.

Spotify is targeting a long-term gross margin rate of 30 to 35 percent, which is beyond the 12.4 percent margin rate Harrigan estimates for 2025. The indicated lifetime value per new premium customer of 25 euro is "disheartening."

One of the arguments bulls highlight is the stock's cheap valuation of 4.3 times 2018E sales versus the other streaming "market darling" Netflix, Inc. NFLX whose stock trades 9.2 times, the analyst said. The comparison isn't warranted, however, as Netflix owns much of its own content and the total addressable market for global video spending is "much larger" than music.

Price Action

Shares of Spotify were trading around $162 at time of publication. The stock is up 8 percent since its IPO last month.

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