Spotify Is The Streaming Music Leader, Barclays Says In Bullish Initiation

Spotify Technology SA SPOT's status as a best-in-class streaming music provider with a superior user experience is one of many reasons why investors can expect the stock to continue to gain value, according to Barclays.

The Analyst

Barclays' Ross Sandler initiated coverage of Spotify with an Overweight rating and $210 price target.

The Thesis

The bullish case for Spotify is fourfold, Sandler said in the Tuesday initiation note:

• The Swedish company already holds a leading position in the "massive" total addressable market of 1.3 billion global smartphone owners.
• Spotify's technical prowess, particularly the recommendation feature, has been a "huge differentiator" since day one.
• The company has been free cash flow positive since 2016, and its unit economics continue to "rapidly" improve.
• Ad revenue is ramping toward 20 percent of total revenue, which implies the potential for "significant" gross and operating margin expansion.

Spotify investors should keep an eye on five trends, Sandler said:

• The business could mature earlier than expected.
• The competitive environment includes "well-resourced" peers that boast distribution advantages.
• Spotify's ultimate goal of 35 percent gross margins is still "much lower" than that of its peers.
• The company could have less pricing power than was assumed. Spotify recently raised prices in Norway by 10 percent, something Sandler said he'll watch closely. 
• The music industry has an incentive to "keep many competitors in the picture."

Price Action

Spotify shares were up 2.72 percent at $175 at the time of publication Tuesday.

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