Bulls on Parade: Analysts Now Value Spotify At $34-$36B

Associated Press

Wall Street hearts Spotify. A lot. A slew of new analyst reports issued Monday (April 30) revealed widespread beliefs that Spotify will be the major player in a bountiful music subscription market.  

Their price target range of $190 to $200 from 17 percent to 23 percent represents the upside. Shares of Spotify were up 2.4 percent to $162.50 in midday trading Monday. The earliest analyst reports showed even more optimism.

On March 29, RBC Capital Markets initiated coverage with an “outperform” rating and a $220 price target. Last month, FBR Capital gave Spotify a neutral rating with a $220 price target.

A progress report of sorts will arrive Wednesday when Spotify announces its first-quarter earnings results at 5 p.m. ET. Valuing a company like Spotify requires some guesswork. The marketplace isn’t very defined. The strength of competitors is unclear.

Spotify’s ability to improve its margins is uncertain. One must take build forecasts, incorporate all other assumptions, and estimate how much free cash Spotify will gain or lose in the coming years. The latest round of analyst reports shows Wall Street is expecting the best: the price range suggests Spotify is expected to beat Apple Music and Amazon in a large and growing music subscription market where margins have improved enough for a standalone company to thrive.

A range of $190 to $200 per share values Spotify at $34 billion to $36 billion. Analysts’ valuations would be justified if Spotify dominates the music streaming market. Two of the analyst reports say Spotify could grow its subscriber base from 71 million at the end of 2017 to roughly 177 million to 220 million subscribers by the end of 2022. Using the current revenue Spotify gets for the average subscriber—which will change over time—177 million to 220 million subscribers equals annual subscription revenue of $12 billion to $15 billion.

Add $1 billion for advertising revenue and the range for annual revenues runs from $13 billion to $16 billion. Even if Spotify doesn’t improve its content licensing margins, a 30-percent gross margin would mean it would have $3.9 billion to $4.8 billion remaining to cover all other costs. There’s one dominant streaming media that acts as a measuring stick: Netflix.

“We believe Netflix is the closest operating [comparable] to Spotify, as both benefit from the secular shift to streaming through subscription based models. Both Spotify and Netflix are underpenetrated in their markets, and we expect secular shifts in both audio and video markets towards streaming to drive double-digit user growth for both.,” said JP Morgan Chase’s report.

JP Morgan believes Spotify can achieve 20-percent subscriber growth over five years, pushing it from 71 million to 177 million subscribers by 2022. But the Netflix comparison goes only so far.

Currently investors give Netflix a market capitalization of $136 billion on revenues of $11.7 billion for a price-to-sales ratio of 11.6. A $36 billion market cap suggests Spotify is being valued at an 8.7 price-to-sales ratio—nothing out of the ordinary for a disruptive streaming media company. Morgan Stanley sees potential in smartphone penetration in Spotify’s current markets of operation and believes subscribers can grow from about 70 million today to 220 million by 2022.

Most optimistically, Morgan Stanley believes Spotify’s “modest” margins are “not an impediment” to generating free cash flow in the near term. BofA/Merrill Lynch issued a buy rating and a $195 price target. BofA Merrill sees value in Spotify’s nine-percent stake in Tencent Music Entertainment Group, China’s largest music streaming company. Tencent is reportedly mulling an initial public stock offering that would reportedly value the company at $25 billion. Spotify valued its investment in Tencent at €910 million ($1.1 billion) at the end of 2017.