Analyst Drops Spotify Rating, Citing 'Too Aggressive' Growth Expectations

Pivotal Research Group dropped its Spotify rating from buy to hold after the company approached Pivotal's $200 price target, said Jeffrey Wlodarczak in a Wednesday research note. The analyst cited “too aggressive” 2018 premium monthly average user (MAU) growth expectations, scaling back Q2 MAU projections to 5.5 million from 6 million and from consensus 7 million, before Spotify’s Thursday earnings report. For the full year, the analyst scaled guidance to 92.5 million users, down from its 93 million projection and 94.5 million consensus, still within Spotify’s guidance of 92 million to 96 million total subscribers. The decision to cut forecasts was due to “credible weakening global Google Spotify search trends data” that continued into Q3, said Wlodarczak, saying the subscriber forecast would have been reduced further, but he expects management to add to its Q3 marketing budget to offset trends. Wlodarczak called Spotify’s current valuation “fair,” but said it doesn’t leave a lot of room for “operational/market hiccups.” The analyst also noted the launch of a “revamped Google YouTube Music” that’s likely to be integrated with Android phones, which, along with Apple Music integration on iPhones, creates the potential for Spotify “to get squeezed as Google and Apple lever their smartphone ‘gatekeeper’ status to aggressively incentivize consumers to trial their internal music streaming services.” Wlodarczak said Apple “likely just passed SPOT” in the number of premium U.S. subscribers, while Facebook has signed music licensing deals to allow its customers to add music to videos, which “may (or may not) lead to a more aggressive FB transition into music.” And, he said, Spotify continues to compete against large internet companies that “are not necessarily focused on ever generating a profit on their music business (and are under no pressure to do so).” Competitors are “extremely well funded, offer a nearly equivalent product, can utilize other businesses to subsidize music and in certain cases can lever their other businesses to drive penetration,” he said. Google and Apple, meanwhile, control the operating systems for virtually all smartphones globally “putting them in a powerful competitive position.” Spotify closed up 0.1 percent Wednesday at $188.09.