Spotify's Recent Weakness Doesn't Change Morgan Stanley's Bullish Tune


Spotify Technology SA SPOT are not far removed from their post-IPO lows, and investors should buy the dip, according to Morgan Stanley.

The Analyst

Morgan Stanley's Benjamin Swinburne maintains an Overweight rating on Spotify with an unchanged $225 price target.

The Thesis

The bullish case for Spotify's stock is partly based on the large global market for streaming music, which continues to grow, Swinburne said in a Wednesday note. (See his track record here.) 

Seventy-five percent of consumers ages 16-64 in 18 global markets listen to music on their phones and 57 percent pay for a streaming music platform, according to third-party data gathered by IFPI, the analyst said. More than 90 percent of consumers in markets like Mexico, Brazil and India listen to music, and these are all untapped markets for Spotify after recent global expansions in countries like Israel, Swinburne said. 

Spotify does have multiple challenges to overcome in entering new markets, including securing local rights in emerging markets, the analyst said. Yet emerging markets also rely less on "Big Three" label content, which offers a better long-term profit profile, he said. 

Aside from a geographical expansion to lift total subscribers, the bullish case for Spotify can also be justified by expectations for margin expansion, according to Morgan Stanley. The company has multiple drivers to lift gross margins in the coming years, including successful contract renewals with major labels and innovation in its free and paid product offerings, Swinburne said. 

Morgan Stanley's $225 price target is based on a 4-4.5 times forward revenue multiple and 15.5 forward gross profit. Both multiples represent a discount compared to Netflix, Inc. NFLX, according to the sell-side firm. 

Price Action

Spotify shares were down 1.81 percent at $150.48 at the time of publication Wednesday. 

Related Links:

Is Spotify The New Netflix? Yes And No, Says MKM Partners

The Latest Trends In Streaming Music, From Apple Music To Spotify

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Posted In: Analyst ColorPrice TargetReiterationAnalyst RatingsBenjamin SwinburneMorgan StanleyStreaming music
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