Shares of Spotify (SPOT) are under pressure on Tuesday after UBS analyst Eric Sheridan double-downgraded the stock to Sell. The analyst believes the recent run-up in the shares is pricing in the "entirety of upside optionality" from growth in podcasting that the analyst modeled in the coming years.
FUTURE PRICED IN: UBS analyst Eric Sheridan double-downgraded Spotify to Sell from Buy with a price target of $204, up from $189. The analyst argued that the 47% run-up in the stock over the past month is pricing in the "entirety of upside optionality" from growth in podcasting that the analyst modeled in the coming years, including subscriber and engagement growth, shift in engagement habits, and potential unit economics improvement.
While podcasting can broaden Spotify's user base, contrary to the bull case, he is skeptical that it will alter supply case dynamics relative to the music industry. Podcasting is much more likely to broaden Spotify's user base, its engagement trends and long-term utility than dramatically alter its cost of content, he argues. Looking forward, Sheridan doesn’t see material risk to published operating estimates in the coming quarters but also doesn’t see pronounced upside that could expand the valuation multiple from current levels.
Voicing similar concerns last week, Bernstein analyst Todd Juenger also downgraded Spotify to Underperform from Market Perform with a price target of $172, up from $134. The analyst noted that while the market has added $20B of value to Spotify since the Joe Rogan podcast announcement, Juenger continues to believe it is unlikely that Spotify will generate much earnings from podcasts.
'EARLY STAGE' STREAMING BUSINESS: Still bullish on the name, Bank of America analyst Jessica Ehrlich raised her price target on Spotify to $357 from $185 on Monday, while keeping a Buy rating on the shares. The analyst believes the company has an "iconic, global but still relatively early stage streaming business" along with optionality from new initiatives such as its enhanced podcast efforts, scaling advertising platform, and two-sided marketplace. Further, she sees Spotify as just starting to leverage its global platform to expand the audio ecosystem beyond music.
On July 6, JPMorgan analyst Doug Anmuth also raised the firm's price target on Spotify to $305 from $185, keeping an Overweight rating on the shares. The stock is up sharply since the Joe Rogan podcast deal in mid-May, but there is further upside as podcasts help Spotify drive ad revenue on owned and licensed content, premium subscriptions and gross margins, Anmuth contended. The analyst added that the "strong secular shift" in streaming music, combined with Spotify's "emerging podcast traction," gives him more confidence in upside to estimates over the next few years.
PRICE ACTION: In morning trading, shares of Spotify have dropped over 2% to $255.56.
Spotify
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