Spotify Technology S.A. (SPOT) - Get Spotify Technology SA Report may just be getting used to trading on public markets, but it's already curried the favor of numerous Wall Street analysts. According to FactSet, Spotify has five buy ratings, one overweight rating and three hold ratings, not too shabby after two days of trading.
The music streaming company's big boost on Thursday, April 5, came from Stifel analysts who initiated coverage of the stock with a buy rating and a $180 price target, implying about a 25% upside for shares from their closing price on Wednesday, April 4.
Stifel said Spotify has a "long runway" for user growth, especially given its tremendous value for subscribers. "We believe an all-you-can-listen-to on-demand music streaming service for $9.99 a month is high on the list of internet services offered on a value per dollar basis, right behind Amazon.com Inc.'s (AMZN) - Get Amazon.com, Inc. Report all-you-can-order (and more) Prime membership and Netflix Inc.'s (NFLX) - Get Netflix, Inc. (NFLX) Report $10.99 a month all-you-can-watch subscription," analysts wrote.
Stifel said it expects Spotify will grow to 300 million monthly active users by 2021, including 159 million paying subscribers, further cementing its status as the largest on-demand music streamer. Its competitive position is made stronger by "technology-driven" personalization, analysts noted. That's especially significant, given the competitive field Spotify plays on: it rivals Apple Inc. (AAPL) - Get Apple Inc. (AAPL) Report , Amazon and Alphabet Inc. (GOOGL) - Get Alphabet Inc. Class A Report .
"We think Spotify's market leadership, emerging markets exposure, favorable user demographics, the secular shift to mobile and digital services, as well as the near-universal appreciation of music, will support Spotify's growth for years to come," Stifel said.
But despite its growing user base, Spotify has been losing cash. According to Stifel, that won't last long given the company's "visible path to profitability." Analysts said, "Spotify can deliver meaningful operating profits and cash flow within the constraints of its current licensing structure, with additional upside if the company is successful with its endeavors in demand creation and/or non-music content."
While investors might worry about margins now, it's worth pointing out that another well-regarded stock experienced a similar issue after it went public in 2002 -- Netflix. "Similar to Netflix, when the company was early on in its transition from DVDs to streaming video, Spotify's margin structure appears far from optimized today," analysts wrote. Spotify should reach operating income profitability by the end of 2020, though, with longer-term margins upwards of 11% by 2024.
"Though several other streaming music services are contributing to the industry's return to growth, by our estimates Spotify's growth itself could return the global music industry to revenue above its 1999 peaks by 2026," Stifel said. As analysts noted, The Buggles were write when they sang, "video killed the radio star," but Spotify killing album sales could be resurrecting the industry at large.
Spotify fell 2.11% to $145.87 on Wednesday. In premarket trading Thursday, shares rallied 4.14% to $151.