Here’s a bracing headline for Spotify and its partners within the music industry, from financial-news website Barron’s: “Spotify Stock Has Dropped So Much, Two Analysts Ditched Their Sell Ratings”.
The story is paywalled, but appears to focus on recent announcements by analyst firms Evercore and Credit Suisse. The former upgraded its rating of Spotify from ‘Underperform’ to ‘In-Line’ earlier this week, while the latter upgraded it from ‘Underperform’ to ’Neutral’.
Upgrades sound good, right? But the reason for the upgrades is not so good: Spotify’s recent declining share price. It’s fallen by 26% since its most-recent high of $154.27 in July to $113.90 this week. Or if you take Spotify’s peak since its IPO of $189.52 in August 2018, the price has fallen by nearly 40% since then.
Both analyst firms expressed concerns about Spotify’s future, too: “The path to substantial gross margin expansion for SPOT is unclear,” suggested Evercore’s Kevin Rippey, while Seeking Alpha paraphrased Credit Suisse’s note as having ‘longer-term concerns about subscriber and revenue growth’. Fears about competition from Apple, Amazon and YouTube are swirling around all this too.
Spotify’s management has always stressed an emphasis on long-term strategy rather than short-term stock-price wobbles. The company has been talking a lot about its ‘two-sided marketplace’ strategy recently, with marketing tools for artists and labels that it will launch in early 2020.
“For the most part, we expect them to be margin-enhancing,” CFO Barry McCarthy told analysts during Spotify’s last earnings call in August. During that call, he also addressed investor concerns about subscriber growth, particularly how it compares to rivals like Apple Music. “I know relative market growth was a concern for investors a couple of quarters ago. The most recent comparison shows we’ve got very strong traction in the business.”
Spotify’s share price since then suggests that investors weren’t convinced, but from a music-industry viewpoint, we suspect rightsholders hope the company avoids the temptation to dive for short-term tactics at the expense of its long-term strategy. Especially since Spotify’s share-price decline is against a context of other tech and digital-media stocks also enduring tough times.