Spotify (SPOT) - Get Report shares dropped Friday after Citi analysts downgraded the stock to sell from neutral on concern that the company's pivot to podcasts may not be working as well as investors hoped.
The firm nonetheless raised its price target on the Luxembourg company to $310 a share from $270. The investment firm still values Spotify at €175 ($211.67) per premium subscription, but it is rolling that valuation forward to 2023 from 2022.
"Among four subscription based stocks – Spotify, Roku, (ROKU) - Get Report Netflix (NFLX) - Get Report and SiriusXM (SIRI) - Get Report – Spotify is the only firm where [Wall Street’s] long-term forecasts (through 2023) do not comport to the prevailing valuation," Citi analyst Jason Bazinet said.
"We suspect this disconnect stems from recent enthusiasm around Spotify’s recent podcast pivot. But, the cadence of premium gross additions (through third-quarter 20) and app-download data (through fourth-quarter 2020) do not show any material benefit from recent podcast investments (that began in 2019)."
Spotify shares at last check were down 4.7% to $326.31. The stock is trading at triple its 52-week low set in mid-March 2020.
Citi says it could change its mind if those metrics begin to improve. Spotify began investing in podcasts to help it move away from dependence on music labels, Bazinet says.
"But, our fear is that if podcasting doesn’t provide a way for Spotify to shift away from music-label dependence, [Wall Street] may reassess the underlying value of the business. And, that would be bad for Spotify’s multiple and equity value," Bazinet said.