Evercore ISI analyst Kevin Rippey downgraded Spotify (SPOT) to Underperform, a sell-equivalent rating, as he believes the recent rally in the stock reflects an "overly optimistic view" as to the trajectory of gross margins and potential label negotiations outcomes. Moreover, the analyst argued that the risk that publisher rates go higher, per the existing CRB ruling, is real, while at the country level, competition is "far more intense" than suggested by global aggregates.
SELL SPOTIFY: In a research note to investors, Evercore ISI’s Rippey downgraded Spotify to Underperform from In Line and lowered his price target on the shares to $110 from $125, stating that the recent rally in the stock "reflects an overly optimistic view" on the company's gross margin path and potential label negotiation outcomes. The analyst noted that he does not see a way for Spotify to generate the gross profits "demanded by Street estimates" in the medium-term.
While there is uncertainty as to the outcome of Spotify's Copyright Royalty Board appeal, the risk that publisher rates go higher is real, he contended. Additionally, Rippey pointed out that despite the company’s global leadership in subscription streaming music, SensorTower data shows that at the country level, competition is "far more intense" than suggested by global aggregates, reducing Spotify's leverage with labels. Lastly, the potential benefits associated with Spotify for Artists and podcasts are smaller than implied in estimates, he added.
APPLE HITS BACK AT SPOTIFY’S CLAIMS: Spotify has filed a complaint with European regulators against Apple (AAPL), claiming the latter abuses its position both as a direct competitor to the former and as the owner of its app marketplace. Spotify CEO Daniel Ek said that the complaint to the European Commission followed the company's unsuccessful attempts to resolve its problems with Apple directly, and highlighted the 30% fee that Apple charges for app payments made through its system. Spotify is forced to choose either to charge Apple customers extra when they sign up through their iPhone apps or to take a hit on the revenue, he said.
Meanwhile, Apple is hitting back at Spotify's claims of unfair treatment in the App Store, Apple Insider's Mike Weurthele reported. According to data supplied by Apple to the European Commission, only 680,000 of Spotify's users are paying 15% of the subscription fee to Apple, and none are paying the 30% that the music streamer claims. Germany's Der Spiegel also noted that Apple only holds 25% of the smartphone market in the EU, nor is Apple Music dominant in music streaming, and argued that Apple shouldn't be considered a monopoly.
PRICE ACTION: In afternoon trading, shares of Spotify have gained over 1% to $150.04.
