In a research note on Monday, Guggenheim analyst Michael Morris downgraded Spotify (SPOT) to Sell, saying he believes the market is now pricing shares for blue-sky growth and potential podcast dominance, making the risk-reward unattractive. Meanwhile, his peer at Morgan Stanley raised the firm's target for Spotify and kept a Buy rating on the stock, citing Spotify's "increasingly differentiated content strategy."
SELL SPOTIFY: Guggenheim analyst Michael Morris downgraded Spotify to Sell from Neutral with a price target of $223, up from $170. While he thinks Spotify is "doing many great things," with its investment in podcast content strengthening its streaming audio leadership position, Morris also believes the market is now pricing shares for blue-sky growth and potential podcast dominance. He recommends reducing exposure with the risk-reward now unattractive.
Morris also said he expects competition for podcast content and distribution to intensify over the next 12 months, particularly from Amazon (AMZN) and Google (GOOG). He believes competitive announcements could negatively impact sentiment from current highly-positive levels implied in the share price. The analyst also noted that in the highest-profile exclusive audio content partnership to date, namely Howard Stern's 2004 partnership with then Sirius Satellite Radio, data does not clearly show a unique impact on subscriber trends, with Sirius and XM (SIRI) growing subscribers at similar rates from 2004 to their merger in 2008.
IMPROVED STRENGTH: Remaining bullish on the stock, Morgan Stanley analyst Benjamin Swinburne raised his price target on Spotify to $275 from $190 and kept an Overweight rating on the shares. Swinburne noted that while Spotify's first quarter results and second quarter guidance highlighted its strength, recent app download data suggests strength has improved further as geographies have begun to reopen, increasing his confidence in its ability to deliver on 2020 guidance. He has also raised his long-term estimates of advertising revenues, citing Spotify's "increasingly differentiated content strategy."
On June 25, Goldman Sachs analyst Heath Terry had also raised the firm's price target on Spotify Technology to $280 from $205, while keeping a Buy rating on the shares. Following a host of exclusive podcast deals, acquisitions and new podcast monetization functionality, Spotify's "strategy acceleration" will drive share gains of the global podcast audience, advance the development of its audio advertising technology platform, help reverse declining average revenue per user trends and serve as a differentiator to drive music subscribers, Terry contended. Further, the analyst believes the "optionality" these efforts create leave the stock's risk/reward favorable despite the recent outperformance.
On June 19, Rosenblatt analyst Mark Zgutowicz raised the firm's price target on Spotify to $275 from $190 and kept a Buy rating on the shares. He noted that over the last few months the company has signed podcast exclusive deals with sports network The Ringer, The Joe Rogan Experience, Kim Kardashian West's The Innocence Project and DC Entertainment. He sees attractive monetization potential from these exclusive deals and also expects them to provide future leverage for premium subscription pricing and label negotiations, Zgutowicz told investors.
PRICE ACTION: In morning trading, shares of Spotify have gained over 1% to $268.49.
