The Street Is Watching Spotify's Outlook, Guggenheim Says In Neutral Turn

Streaming music platform Spotify Technology SA SPOT has seen its stock fall around 40 percent from highs near $200 per share and is fairly valued, according to Guggenheim.

The Analyst

Analyst Michael Morris downgraded Spotify from Buy to Neutral with a price target lowered from $190 to $120.

The Thesis

Spotify issued long-term goals in 2018, including 25-35-percent revenue growth and gross margins of 30-35 percent, but expectations for the company to hit these targets are mixed, Morris said in the Monday downgrade note. (See his track record here.)

The Street's consensus outlook for 2019 is for Spotify to show an acceleration in premium and ad supported subscriber growth along with an acceleration in annual revenue growth, the analyst said.

The research firm's own 2019 estimates call for 22-27-percent monthly active user growth, 25-29-percent premium subscriber user growth and 20-30-percent total revenue growth. While these estimates are "achievable," Spotify's outlook will have a "significant impact on sentiment," Morris said.

Spotify and its major content partners will likely renegotiate existing agreements, with consumers being unlikely to see any disruption, the analyst said. Any finalized agreements will probably lack catalysts that would support margin expansion consistent with Spotify's goals, he said.

From an EV/EBITDA perspective, Spotify's stock looks expensive at 37.8 times 2021 estimated EV/EBITDA, which is a premium to other digital media peers, including Netflix, Inc. NFLX at 23.6 times, according to Guggenheim.