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Wall Street's Turning Up the Volume on Spotify Again

By Rick Munarriz - Oct 2, 2019 at 2:35PM

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Two analysts upgrade Spotify this week, but -- plot twist -- neither one is bullish on the stock.

For the second time in as many days, Spotify Technology (SPOT 3.92%) finds itself on the winning end of an analyst upgrade. Spotify was upgraded from underperform to in line at Evercore ISI earlier this week, and now Bryan Russo at Credit Suisse is lifting his rating on the shares from underperform to neutral.

One can rightfully point out that neither Wall Street firm is bullish on the popular music-streaming service. However, as of this week, both of those firms are also no longer bearish. Baby steps matter, and for Spotify -- a stock that has been languishing since hitting the market at a reference price of $132 in the springtime of last year -- that's going to have to be good enough for now.

Spotify running on a PC, laptop, and smartphone.

Image source: Spotify.

Facing the music

Russo at Credit Suisse feels that a lot of the Spotify negativity, including a likely subscriber miss for the recently concluded third quarter, is already priced into the shares. With short interest on the stock near historical highs and the stock surrendering nearly 30% of its value over the past two months, the risk-to-reward ratio is now balanced.

It's not all good news. Russo continues to have long-term concerns for Spotify's ability to grow its subscriber and revenue levels at market-pleasing rates. The push into emerging markets will also drive average revenue per user lower. It's also worth noting that Russo's price target of $120 offers a small amount of upside at the stock's present levels, but it was consistently trading above that mark through most of this year until buckling under last week. In short, this upgrade is pretty much the handiwork of a sinking stock. Evercore ISI analyst Kevin Rippey had followed the same path to his upgrade, essentially stating that his earlier bearish bent was based on the stock trading at $150 -- and that's clearly not where the shares are now.

These moves are small even for baby steps.

Spotify has struggled to connect with investors in its first 18 months of stateside exchange trading. Investing in IPOs is risky, and plenty of big-name debutantes from the class of 2018 and 2019 are currently trading underwater.

Growth is still there to be had at Spotify. Revenue rose 31% in its latest quarter, matching the 31% surge in premium subscribers. Spotify now serves up audio entertainment to 108 million paying subscribers, with a total audience of 232 million monthly active users.

Revenue has risen between 26% and 33% in each of the past six quarters, so it's not as if the business is slowing down. The bigger concern for investors is Spotify's lack of profitability. Analysts see the red ink continuing until at least 2021, and it doesn't help that it's coming off of back-to-back quarters of posting larger-than-expected losses. It's not easy turning a profit in this niche unless you're selling iPhones or satellite radio receivers and using streaming as a way to keep your customers close.

Spotify is still a major force in a growing field. It has time to get things right. Investors better hope that if neutral analysts turn bullish later this year, it's not because the stock has fallen even lower. Upgrades are always welcome, but they tend to mean more when the accompanying news is good.

Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Spotify Technology. The Motley Fool has a disclosure policy.

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