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Stock Analysis & Ideas

Spotify Stock: Getting Cheaper, but Lacks Catalysts

Shares of music-streaming service Spotify (SPOT) have been retreating rapidly of late, thanks in part to the broader weakness in streaming. Though Spotify has attempted to distance itself from the fallen video-streaming company Netflix (NFLX), investors have just lost faith in the Swedish-based firm.

The stock now finds itself down around 76% from its all-time high of around $364 per share. On Monday, the stock fell below $100 per share for the first time and is now under $94.

Though the valuation makes more sense today than it did a few months ago, Spotify doesn’t really have many catalysts going for it. Further, the commoditization of streaming could hurt the company’s ability to raise prices by a considerable amount.

Undoubtedly, Spotify has been through a lot over the past year. Yet, many of its users have stood pat. The Joe Rogan controversy may have caused some to switch, but it seems like the negative effect of the Joe Rogan headwind is now in the rear-view mirror.

In any case, Spotify should have known of the potential consequences of bringing on such a popular podcast host who’s been known to speak his mind, perhaps sometimes without a filter.

As Spotify stock tumbles further, I remain bearish. The valuation is easier to get behind now, but competitive pressures could weigh further.

Spotify’s Struggles to Differentiate Itself from Rivals

Spotify faces pressure from top rival Apple (AAPL) Music, with its intriguing new innovations. However, the firm also faces intensifying competitive pressure from other corners of big tech.

Undoubtedly, it seems like every big-tech firm is bundling music streaming alongside other services these days. It’s this bundling phenomenon that leaves Spotify at a huge disadvantage.

Eventually, cost savings at a competitor will be enough for consumers to make the jump.

Still, it is tough to move your favorite tracks and playlists across music-streaming services. Though this inconvenience could be viewed as some sort of moat for Spotify, it’s worth noting that there are tools out there that help make the move smoother.

Although exclusive podcasts—think the Joe Rogan experience—have been able to help Spotify differentiate itself a bit, it will be harder for Spotify to compete on price as bundlers beckon in consumers with savings.

Undoubtedly, consumers can get tremendous value from a bundle that includes music, video, cloud storage, and gaming, among other services. Though Spotify has podcasts going for it, which is technically separate from music, it may need to wander outside its circle of competence to produce a bundle that can stack up against Spotify’s big-tech competitors.

We’ve seen a similar issue with Netflix, which seeks to make a big splash in video games to offer consumers more than video streaming. Indeed, gaming and video are an intriguing bundle. Still, Netflix’s gaming business is in its infancy and is unlikely to entice users back to its platform anytime soon.

Indeed, a merger between Spotify and Netflix would make a lot of sense. Such a bundle—comprised of music, podcasts, video, and games—would be the perfect answer to big-tech disruptors.

Spotify: Good Quarter; Bad Guidance

For the first quarter, Spotify reported decent numbers that topped guidance. Still, management was downbeat on its second-quarter guide, and that was enough to weigh on the stock.

These days, anything less than a “beat and guidance raise” is sure to be met with excessive selling. With the economy at risk of falling into recession, there is some fear that consumers will tighten their budgets. While the free, ad-based tier of Spotify could get a boost, it’d likely come at the cost of paid users.

Further, if Spotify’s rivals—think Apple Music—introduce an ad-based tier, things could get much uglier for Spotify. In addition, bundling with other service providers (think Apple One’s service bundle) may offer enough value such that consumers stop using Spotify altogether.

For now, Spotify is 422 million MAU (monthly active users) strong, but big-tech will be hungry to take share.

Wall Street’s Take

Turning to Wall Street, SPOT stock comes in as a Moderate Buy. Out of 22 analyst ratings, there are 12 Buys, nine Holds, and one Sell recommendation.

The average Spotify price target is $150.24, implying upside potential of 61%. Analyst price targets range from a low of $95.00 per share to a high of $235.00 per share.

The Bottom Line on Spotify Stock

Spotify has a limited number of catalysts to put in a bottom to its stock. Still, the valuation is ridiculously depressed. At around 1.6 times sales, Spotify may prove to be undervalued if management can keep competitors at bay with unique offerings, perhaps beyond podcasts.

For now, most Wall Street analysts are bullish, with a consensus upside potential of 61%.

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