Investing.com – Wolff Research lowered its credit rating Spotify technology (NYSE:) to Peer Performance from Outperform on Friday, citing concerns about its valuation and the limited profitability of its core music streaming business.
The company noted that although Spotify is “on track for more than 1 billion global users” and has successfully expanded its offerings to include audiobooks and video, future growth will require more than just music share gains and pricing.
Wolfe Research highlighted that the company’s “valuation appears reasonable,” but that “music tenant economics” are constraining margins, necessitating additional investments in new segments to achieve long-term gross margins of 35-40%.
The company expressed concerns about Spotify’s “developed markets becoming saturated” and the company’s services becoming “9-18% more expensive than other ISPs.”
This downgrade comes on the heels of a strong 2024 for Spotify, driven by price increases and continued stock gains with “minimal change.”
However, Wolfe Research cautioned that the future revenue outlook looks “full” following repeated price hikes, steady user growth in developed markets, and modest tiered benefits.
“We now believe that risk prediction for key KPIs is skewed negatively,” Wolf stated.
Additionally, Wolfe’s research noted that “the economics of music rental require more investment in new sectors.”
Despite strong gross margin expansion in 2024, the company sees limited near-term margin growth opportunities, as “65% of music revenue” is paid to content creators. The report forecasts rising audiobook costs, AI investments, and changes in advertising revenues from select audio files.
Wolfe Research concluded that while Spotify’s “very solid growth story” remains intact, the path to further upside is less clear, warranting a downgrade to Peer Performance.
https://i-invdn-com.investing.com/news/moved_LYNXMPEH23179_L.jpg
Source link