Music industry stocks were on the move Tuesday after a prominent analyst initiated coverage on Spotify Technology SA (NYSE: SPOT), Sirius XM Holdings Inc (NASDAQ: SIRI), iHeartMedia Inc (NASDAQ: IHRT) and Entercom Communications Corp. (NYSE: ETM).
Wells Fargo analyst Steve Cahall started the following coverage:
- Spotify initiated at Underperform, $115 target.
- Sirius XM initiated at Outperform, $8 target.
- iHeartMedia initiated at Outperform, $21 target.
- Entercom initiated at Market Perform, $4 target.
Cahall said Spotify has a great product, but there is simply too much uncertainty surrounding its business model to justify a higher valuation.
“While growth is likely to continue, we see limited pricing power due to deep-pocketed competition,” Chall wrote in a note.
Cahall said happy customers don’t necessarily make for happy investors, and he compared Spotify stock to underperforming Tesla Inc (NASDAQ: TSLA) in that respect.
Cahall is much more bullish on Sirius XM given its impressive growth in average revenue per user. Now that investors are starting to realize that the acquisition of Pandora wasn’t due to weakening underlying fundamentals, Cahall said the stock’s valuation may recalibrate.
Cahall is also bullish on iHeartMedia, which he said offers investors a compelling combination of traditional and digital radio.
“We estimate that today IHRT is ~60% broadcast radio, but that’s decreasing to <50% in the next 3-5 years as digital grows by double digit percentages and Live Events expands too,” Cahall said.
The combination of digital and traditional radio, revenue growth drivers and margin expansion opportunities makes iHeart Media Wells Fargo’s top overall audio stock pick.
Spotify investors in particularly may be disappointed in Wells Fargo’s bearish take on the stock. However, it’s important to note that the analyst’s issue isn’t with the company itself or its product. It’s simply that Spotify remains a “show-me” stock at this point.
If Spotify can figure out a way to demonstrate to critics that it is a long-term fundamental growth story with reliable pricing power and dependable quarterly numbers, the stock may ultimately win over analysts and skeptical investors alike.
Do you agree with this take? Email email@example.com with your thoughts.
KeyBanc Warns Apple Investors: 'Spotify Complaint Has Merit'
Latest Ratings for SPOT
|Sep 2019||Initiates Coverage On||Underperform|
|Aug 2019||Initiates Coverage On||Equal-Weight|
View More Analyst Ratings for SPOT
View the Latest Analyst Ratings
See more from Benzinga
© 2019 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.