Spotify cut by Wolfe Research as bullish case calls for more than music share gains Investing.com
Investing.com — Wolfe Research downgraded Spotify technology (NYSE: ) 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 “inching toward 1B+ global users” and has successfully expanded its offerings to include audiobooks and video, future growth will require more than just increasing music share and pricing.
Wolfe Research noted that “the company’s value looks reasonable,” but “the renter economy in music” is limiting margins, requiring additional investment in new verticals to achieve long-term gross margins of 35-40%.
The company expressed concern over Spotify’s “saturation of developed markets” and that the company’s services would become “9-18% more expensive than other DSPs.”
The downgrade follows a strong 2024 for Spotify, driven by rising prices and ongoing stock gains with “minimal churn.”
However, Wolfe Research warned that future revenue forecasts appear “full” after frequent price increases, steady user growth in developed markets and modest scale advantages.
Wolfe stated, “We now think the forecast risk for key KPIs is negative.”
Additionally, Wolfe Research noted that “the economics of music rentals require further investment in new verticals.”
Despite strong gross margin growth in 2024, the company sees limited near-term opportunities for margin growth, as “65% of music revenue” is paid to creators. The report anticipates rising audiobook costs, investments in artificial intelligence and changes in advertising revenue for select vodcasts.
Wolfe Research concluded that while Spotify’s “very durable growth story” remains intact, the path to further growth is less clear, justifying a cut to Peer Perform.
