Evercore ISI Changes Channels On Spotify, Says Gross Profit Projections Overly Optimistic
Streaming music company Spotify Technology SA (NYSE: SPOT) should be able to match the Street's user and revenue estimates, according to Evercore ISI, but three main concerns prompted the sell-side to downgrade the stock Monday.
The Analyst
Kevin Rippey downgraded Spotify from In Line to Underperform with a price target lowered from $125 to $110.
The Thesis
The Street's expectations for Spotify's level of gross profit over the near-term are likely unachievable for three reasons, Rippey said in a Monday note. (See his track record here.)
First, the loyalty rates streaming providers pay publishers will increase by around 100 basis points per year through 2022. Spotify has some avenues to "gain some relief," but there is the possibility it won't come in time, the analyst said.
Second, Spotify likely accounts for 20% to 25% of major labels revenue and up to 40%-50% of EBITDA. Yet if Spotify were to exit a market, consumers would have no problem quickly moving to a competing streaming provider, Rippey said. This implies that Spotify's leverage over major labels is "less than many bulls suspect" and suggests it has less power to gain concessions from the labels, he said.
Third, Spotify's push into non-music content like podcasts will bring a "relatively modest" benefit to future profits, the analyst said.
Assuming royalty rates with record labels remain at the same levels and publisher royalties increase by 160 basis points on a consolidated basis by 2022, then Spotify could generate $650 million of gross profit, Rippey said.
This figure represents a notable uptick from zero today and represent nearly 20% of total 2022 gross profit, he said.
"While we believe there is some potential upside from revenue streams beyond music, the magnitude implied
in street estimates is unrealistic."
Price Action
Spotify shares were up 1.27% at $150.20 at the time of publication Monday.
Related Links:
Spotify Hits 100M Premium Subs; Buckingham Sees 20% Upside
Analysts Positive On Spotify's Content Spending Despite Margin Impact
Latest Ratings for SPOT
Jun 2019 | Downgrades | In-Line | Underperform | |
Apr 2019 | Maintains | Buy | Buy | |
Apr 2019 | Maintains | Buy | Buy |
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