Investing.com — Wolfe Research Downgraded Spotify technology (NYSE:) to Peer Perform from Outperform on Friday, citing concerns about its valuation and the limited profitability of its core music streaming business.
The company noted that while Spotify is “moving toward over 1 billion global users” and has successfully expanded its offerings to include audiobooks and video, future growth will require more than just share gains. market and pricing in the music industry.
Wolfe Research noted that the company’s “valuation appears reasonable,” but that “the tenant economy in the music industry” is limiting margins, requiring additional investment in new verticals to achieve margins. long-term gross revenues of 35 to 40%.
The company expressed concerns that Spotify is “saturated in developed markets” and that the company’s services are becoming “9-18% more expensive than other DSPs.”
The downgrade follows a strong 2024 for Spotify, driven by continued price increases and market share gains with “minimal churn.”
However, Wolfe Research cautioned that future revenue forecasts appear “full” after frequent price hikes, steady user growth in developed markets and modest tiering benefits.
Wolfe said: “We now believe the risk forecast for key KPIs is negative. »
Additionally, Wolfe Research highlighted that “the music tenant economy requires additional investment in new verticals.”
Despite solid gross margin expansion in 2024, the company sees limited opportunities for margin growth in the near term as “65% of music revenue” is paid to creators. The report expects increased costs related to audiobooks, AI investments and a shift in advertising revenue from some vodcasts.
Wolfe Research concluded that while Spotify’s “very sustainable growth story” remains intact, the path to further upside is less clear, warranting a downgrade to Peer Perform.
