Pivotal Downgrades Spotify, Says YouTube, Facebook Pose Threat

Newly public streaming music platform Spotify Technology SA SPOT could be too optimistic in its monthly active user forecast, Pivotal Research Group said in a Wednesday downgrade. 

The Analysts

Pivotal analyst Jeffrey Wlodarczak downgraded Spotify from Buy to Hold and maintained a $200 price target. 

The Thesis

Pivotal lowered its second-quarter projection for Spotify Premium monthly active growth from 6 million to 5.5 million for a total of 80.5 million, far lower than Spotify’s 92-96 million MAU guidance for 2018. 

"While we are generally comfortable with our new ’18 forecasts and the fact that overall music streaming still is in its relative early innings, there are underappreciated risks that may not be reflected in the current valuation,” Wlodarczak said in a Wednesday note. (See the analyst's track record here.) 

Based on Alphabet Inc GOOG GOOGL search trends, consumer interest in Spotify has been slowing, and the streaming platform's projections may be overly optimistic, the analyst said. 

Spotify will likely raise its marketing spending in the second half of the year to combat negative trends, Wlodarczsak said. 

The launch of Google YouTube Music could prove detrimental to Spotify, according to Pivotal. If the project integrates with Android and Apple Inc. AAPL, smartphone users may find more incentives to use Mountain View's streaming service, the analyst said. 

Facebook also plans to further develop music licensing on its platform. 

"SPOT continues to compete against the largest internet companies in the world that are not necessarily focused on ever generating a profit on their music business (and are under no pressure to do so),” Wlodarczak said.  

Price Action

Spotify shares were down 0.69 percent at $186.57 at the time of publication Wednesday. 

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