RBC Bullish On Spotify Ahead Of IPO, Sets $220 Price Target

Wall Street isn't waiting for Spotify Technology (NYSE: SPOT)'s planned April 3 IPO to weigh in on the stock.  

The Analyst

RBC Capital Markets analyst Mark Mahaney has initiated coverage of Spotify with an Outperform rating and $220 price target.

The Thesis

Spotify stock has roughly 70-percent upside from its recent $127.50 private transaction price, Mahaney said in a Thursday note.

The future of the music industry is streaming, and Spotify is the global leader in the sapce, the analyst said.

RBC estimates the total worldwide addressable market for music streaming at $125 billion, leaving a massive growth opportunity for Spotify. 

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Spotify has 71 million paid subscribers and 92 million monthly active users contributing to its advertising business — nearly twice the number of subscribers as its closest rival service, Apple, Inc. (NASDAQ: AAPL)’s Apple Music, Mahaney said. 

“Very high global aided brand awareness, relatively high customer satisfaction scores and superior data-driven personalization all combine to help Spotify maintain its leadership position." 

Spotify’s business fundamentals are in an upswing, with gross margins jumping from 14 percent in 2016 to 21 percent in 2017 and churn declining from 7 percent to 5 percent since 2015, according to RBC. 

The analyst projects $8.32 billion in revenue for Spotify in 2019 and 20-percent compound annual revenue growth over the next decade. Spotify’s recent private market prices suggest the stock is trading at an enterprise value-to-sales ratio of about 3.7, a significant discount to Netflix, Inc. (NASDAQ: NFLX), Mahaney said. 

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