Shares of Spotify (SPOT) dropped on Monday after shares were downgraded at Evercore ISI, with the firm's analyst saying the risk/reward has "titled back in favor of rewarding shorts." The analyst said Facebook (FB), Lyft (LYFT) and Match Group (MTCH) are his best ideas in Internet. Analyst Benjamin Black also raised his price target for Alphabet (GOOGL), saying the Google parent should continue to "compound" on its dominance in Search and video advertising, although he does not expect its Cloud business to see a positive inflection.
SPOTIFY DOWNGRADE: Evercore ISI analyst Benjamin Black downgraded Spotify Technology (SPOT) to Underperform from In Line with an unchanged price target of $115. The analyst, who views Spotify as a "tool for tactical trading," says the risk/reward with the shares back near $160 has "tilted back in favor of rewarding shorts."
Black also told investors in a research note that material margin expansion is likely "a pipe dream," as rivals operate streaming music services at "breakeven or worse" to the benefit of broader ecosystems. Additionally, the analyst said he believes the stock's run from lows has been driven by increasing confidence that a new agreement with labels will improve visibility to the path to gross margin expansion, but thinks that these announcements related to new label deals will disappoint expectations. Further, Black stated that outside of a drastic change in consumer listening habits, he sees little upside from Spotify for Artists.
While Spotify is the global leader in streaming music, the Evercore ISI analyst said his major concern is that the industry itself will remain unprofitable.
ALPHABET PRICE TARGET RAISE: Meanwhile, the Evercore ISI analyst raised his price target on Alphabet to $1,600 from $1,350 and kept his Outperform rating, saying the company should continue to "compound" on its dominance in Search and video advertising, but is hesitant to grow overly bullish on a positive inflection in the Cloud business. Additionally, Black said margin trajectory is likely to remain biased lower, though growth in absolute OI dollars should remain in the mid-teens.
Black told investors in his research note that even if the company's recent revenue slowdown was an unexpected surprise, Google is the "undisputed king" of search and that its long-term trajectory remains intact. The analyst added that YouTube remains arguably the most under monetized asset in all of digital media, as it generates well over a billion hours of daily viewership, but generates less than $20B in annual revenue. While near-term structural challenges to an immediate step up remain, he said longer-term upside is "extremely" compelling.
Beyond advertising, Black thinks Alphabet could be well positioned for decades of growth.
FACEBOOK, LYFT, MATCH NAMED BEST IDEAS: Evercore ISI's Black also highlighted Facebook, Lyft and Match as his best ideas. Specifically, he called out:
- Facebook, saying positive margin inflection is more likely a question of “when” not “if" and that ~20% earnings and/or free cash flow growth is achievable through the early 2020s. While regulatory risk won’t be eliminated, the analyst said he expects scenarios that reduce uncertainty to be viewed as a positive.
- Lyft, saying that its singular focus on increasingly rational marketplaces, ridesharing in North America, should drive upward estimate revisions and multiple expansion in fiscal 2020. He noted that city-level marketplace maturity and lower reliance on price competition are major drivers of profitability as subsidies are withdrawn and take rates expand.
- Match, saying that improved payer conversion and growing MAUs are likely to drive subscriber net additions above street estimates for the foreseeable future, likely resulting in upward estimate revisions.
AMAZON ESTIMATES LOWERED: Benjamin Black lowered his 2021E Amazon OI estimate to $26.4B from $30.3B in order to capture the company’s investments in delivery capacity and infrastructure as well a larger physical store footprint. While he expects that these investments will be ROIC accretive overtime, he thinks that they will limit 2020 OI upside.
PRICE ACTION: At midday, shares of Spotify fell 3% to $151.38, while Alphabet Class A shares gained 0.5% to $1,435.62.