Shares of music streamer Spotify (SPOT) have been dealt a rocky road of late, now down around 50% from its peak levels hit back in early 2021. Undoubtedly, Apple (AAPL) has been applying pressure with its Apple Music offering and its inclusion in a subscription bundle called Apple One.
Apple One, which includes Apple Music alongside various other services, is a considerable bargain that Spotify cannot match, at least not on its own.
While Spotify has done a remarkable job of differentiating itself in the music-streaming industry, specifically with exclusive podcasts, the company may have to do more to maintain its valuation. Shares of SPOT remain rich in a market that Apple may further lean into with advancements such as lossless and spatial audio. For now, I am bearish on SPOT stock.
Competitive Pressures Mount
Spotify is still a force to be reckoned with in the music world, but the space is getting crowded, and its slice of the pie could continue to shrink unless it’s able to further broaden its focus.
Indeed, many companies have had to broaden their focus to raise the bar on their TAMs (Total Addressable Markets) and justify their hefty valuation multiples. Spotify has done such by moving from music to audio with its podcast push. That said, the company may need to shock and impress on the innovation front to win over the investment dollars of investors who want to see more than just revenue growth.
Spotify’s revenue growth has been impressive, with total revenues jumping 27% year-over-year, thanks to more listeners. Most notably, ad revenues soared 75% year over year, thanks to the firm’s podcast push. Indeed, the Joe Rogan Experience is a podcast beckoning in many younger male audiences.
Spotify Needs to Do More to Fend Off Apple Music
While Spotify does differentiate itself from peers—most notably Apple Music—with its exclusive podcasts and its ad-based listening tier, one can’t help but notice the competition is getting crowded. Perhaps crowded enough that such differentiating factors may no longer be a source of a moat. While unlikely, all Apple has to do is create a free version of its music-streaming service, and the pressure on Spotify’s ad business is on, as free users look to jump ship.
Undoubtedly, there are low switching costs in the industry, except perhaps big fans of particular podcasts. In any case, the leading music streaming service’s pursuit of profitability looks as hazy as ever. Apple, a profoundly profitable firm, can take a hit.
What worries me most about Spotify is what would happen if Apple and its profoundly deep pockets were to begin really innovating in the music space. Alongside its superior value proposition (subscribers don’t need to pay more for lossless audio), Apple Music has a pathway to the top of the industry.
Further, the next iteration of Apple’s popular AirPods product could include various technologies best-used on (or exclusive to) Apple Music. Certainly, lossless and spatial audio technologies look like the next frontier in the music space.
Spotify HiFi: The Answer to Mounting Competitive Pressures?
While Spotify has a lossless HiFi service on the horizon, it will be tough for Spotify to compete with Apple Music’s equivalent offering.
For now, Spotify HiFi faces delays, and consumers are being left in the dark. For Spotify stock to escape its funk, it needs to have such innovations ready at a competitive price point.
Wall Street’s Take
Turning to Wall Street, SPOT stock comes in as a Moderate Buy. Out of 15 analyst ratings, there have been 11 Buys, three Holds, and one Sell rating assigned in the past three months.
The average Spotify price target of $329 implies 71.5% upside potential. Analyst price targets range from a low of $260 per share to a high of $385 per share.
The Bottom Line on SPOT Stock
Personally, I think competitive pressures and audio innovation spending could push Spotify further away from sustainable profitability. In the market environment we’re in currently, where investors are ditching unprofitable companies, it could be challenging for SPOT stock to put in a bottom.
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