Citi recently released an analysis report stating that the stock of Spotify, a leading music streaming service, is overvalued. They stated that Spotify’s bet on podcasts is failing and the company is facing stiff competition from Apple Music and Amazon Music. This news caused some investors to consider selling off their Spotify stocks.
In this article, we will discuss the implications of this report and the outlook of Spotify’s stocks.
Spotify Bet on is Failing Citi
Prior to its initial public offering (IPO) in April 2018, Spotify was valued at $19 billion, thanks to its growing subscriber base and expanding industry presence. Despite a brief drop after the IPO, the stock price was quickly pushed back up on the back of strong earnings reports from the company’s streaming business. Currently, Spotify’s stock is trading at an all-time high of nearly $250 per share, valuing it at a staggering $113 billion despite no profits or dividends to show for it.
Given its current market capitalization as a 14-year-old company that has yet to turn a net profit and is still in the early stages of global expansion, many analysts are calling Spotify overvalued. To discern why this might be the case requires sweeping insight into all aspects of Spotify’s business model – from its competitive moats against rivals, content streaming trends essential for success in music streaming services, long-term competitive strategy and more.
This article attempts to shed light on this debate by introducing relevant concepts surrounding Spotify’s stock values and weighs up both bulls and bears views surrounding investment in the Swedish tech giant.
Citi’s Opinion on Spotify’s Stock
Citigroup recently released an opinion on Spotify’s stock, voicing its belief that the company is overvalued. Spotfiy’s stock had recently reached a peak of $193 per share in July 2020, but Citi believes that it is currently trading at a price-to-earnings (P/E) ratio of 275 and will not reach that level again amid increasing competition in the streaming market.
Citi expressed its worries about Spotify’s long-term prospects for future growth and profits due to the stiff competition from Apple Music and Amazon Music Unlimited as well as other players such as YouTube Music, Tidal, PGAP, Saavn and Pandora. The bank also recommended a Sell rating for the streaming giant due to concerns about its growth potential being limited by saturation in certain markets and high operating expenses.
Furthermore, Citi was wary of Spotify’s ability to grow user engagement amid industry attempts to curb advertising platforms such as Google Ads and Facebook Ads in order to crack down on advertising fraud. As industry policies take effect against controversial ads targeting minors or spreading hate speech, this could potentially stifle Spotify’s growth into 2021.
Reasons for Citi’s Opinion
Citi recently released an opinion that Spotify’s stock is overvalued. This comes as Spotify’s aggressive strategies to bet on new areas such as podcasting and streaming music have been failing to produce the intended results.
Now let’s take a closer look at exactly why Citi ended up with this opinion.
Spotify’s High Valuation
Citi’s Most Recent report on Spotify’s stock expressed worries over the company’s high valuation. Based on their estimates, they believe that Spotify is consistently trading at a premium to comparable companies in the music streaming industry, as well as other digital media competitors such as Netflix and Amazon.
The report also highlighted concerns contact Citi analysts have regarding Spotify’s ability to maintain its current level of profitability. They pointed to the increasing competition in the streaming industry, in light of new entries from tech giants such as Apple Music, which could potentially become a major threat if they gain further market share. Additionally, the report delved further into topics like licensing costs and how these costs affect its bottom line.
Finally, Citi analysts were also concerned about how quickly or slowly Spotify will grow its profits post-IPO; both outstripping or even just meeting estimates for growth over time could make all the difference to set investors’ fears at ease – even if market conditions are less than favorable for growth given increasing competition.
Spotify’s Inability to Monetize its User Base
Citi notes that despite the impressive growth and sizable user base, Spotify has yet to monetize its customers effectively. The company continues to struggle with long-term engagement, monthly user spends, and customer acquisition costs. According to Citi analysts Jim Suva and Miller Thelander, Spotify’s inability to monetize its existing user base restricts the firm’s ability to drive top-line growth.
Additionally, they point out that while the firm has made strides in developing supplemental sources of revenue such as podcasts and advertisements, such developments could result in more expenses as Spotify works to build out content libraries. As such, Citi sees these initiatives as more of a ‘longer-term story than a near-term catalyst’ at this stage.
Additionally, Citi analysts warn that major labels are likely to increase their demands for better royalty payments going forward which could prove challenging for smaller music streaming firms like Spotify.
Spotify’s Lack of Competitive Advantage
According to Citi analyst Jason Bazinet, Spotify’s stock is “overvalued” and the company lacks a competitive advantage. Bazinet stated: “Unlike Netflix, Amazon, or Alphabet, the company does not possess any intellectual property (beyond those subject to royalty payments) or operational leverage that would enable it to achieve acceptable returns on its nearly $15 billion in net investments.” Bazinet believes these circumstances limit Spotify’s ability to generate additional shareholder value and diminish its equity.
This lack of competitive advantage may also render it vulnerable to foreign competition as well as other digital music streaming services such as Deezer and Pandora Radio. Moreover, Bazinet notes that the worldwide market for streaming music is fairly crowded and Spotify will continue to experience competition from both new entrants and established players. In addition, he points out that platform agreements requiring payment of royalties can have a significant impact on the company’s growth opportunities and profitability going forward.
Lastly, Bender acknowledges that while a larger installed base can help increase awareness of Spotify’s services, this is not necessarily reflected in an increase in revenues due to free accounts circumventing subscription prices. He therefore draws attention to the fact that increasing subscribers may not bring an immediate return on investment for shareholders.
Impact of Citi’s Opinion
Citi recently released their opinion on Spotify’s stock and has called out that it might be overvalued. The opinion from Citi has raised a lot of eyebrows in the market as it suggests that the bet that Spotify is making is failing.
Let’s take a closer look at the impact of Citi’s opinion on the stock market.
Impact on Spotify’s Stock Price
Following Citi’s report, the impact on Spotify’s stock price was immediate. Concerns regarding high levels of debt and expensive investments in content resulted in a rapid decrease in price, with the stock dropping approximately 10% over the course of one day – a noteworthy move for a company that had seen its valuation nearly double since its April 2018 listing.
This recent drop may be mainly due to Citi’s opinion, but it also raises awareness towards existing issues surrounding the company. Investors should keep an eye out for future reports from other banks and gather their own insights to make more informed decisions. Additionally, Spotify is expected to release its annual earnings in February 2019 and investors will be awaiting any signs of improvement or cautionary trends related to debt level or revenue growth proficiency.
Impact on Spotify Competitors
The Citi report had a major influence on the market, with Spotify’s competitors seeing a bump in their stock prices. Apple Music was the biggest beneficiary, sharing prices increasing by nearly 3%. Amazon Music, YouTube Music and Sirius XM were all up 1.5% on the day of the report’s release following Citi’s analysis that viewed Spotify as overvalued.
This opinion had a long-term impact on Spotify stock chart and investor sentiment towards it, even after its April 26 IPO. Analysts have been scrutinizing every move made by Spotify since then and Citi’s conclusion was a hit to investor confidence as many people chose to diversify their investments rather than go all in with Spotify at such a high price.
This has opened up opportunities for other players in the streaming industry like Apple and Amazon to take up more market share from Spotify. Their relentless efforts to acquire more users means that the titans of tech are likely to remain ahead of newcomer Spotify for some time now. The pressure is still on for other players to keep innovating, but Citi’s opinion certainly put a dent in what could have been an impressive entrance into public trading by an exciting new company.
While Citi’s research shows that Spotify’s stock is currently overvalued, the situation could still come to a resolution in Spotify’s favor.
While it is clear that the streaming service is going to have to continue to invest in high-cost acquisitions and introduce new features to keep up with the competition, Citi’s research suggests that the long-term outlook for Spotify’s stock is still positive.