Spotify Stock Takes a Hit after Citi Downgrade and Apple News

Jan 19, 2021

Spotify, an audio streaming company worth roughly $60 billion, has been on a rollercoaster this month. Spotify’s shares hit an all-time high on January 8th, ending the day at $353.11. However, fast forward one week to Friday, January 15th, and Spotify stock has sunk by 7%.   

The Apple Factor  

What or who is the catalyst behind the shifts in the audio streaming world? You probably already guessed it – Apple. Last week Apple announced that it is in talks to start a new podcasting subscription service.    

The tech giant’s move into podcasting hasn’t surprised anyone considering that the company has continuously been trying to open new revenue streams. For many years, Apple’s podcasts have been merely an add-on, but now this may change.   

Apple’s already one-upped the competition to a degree. Firstly, it was among the first to revolutionize the podcasting industry 20 years ago, and secondly, all of the iOS devices already come preinstalled with their podcasting app. Drawing customers away from companies like Spotify might not be such a Herculean task for Apple.   

The Citi Factor  

Spotify recently spent roughly $800 million on its podcasting venture. With that, it acquired firms such as the Gimlet Media and The Ringer, as well as exclusive rights to high-profile celebrity content from Joe Rogan, Michelle Obama, The Duke and Duchess of Sussex, and Kim Kardashian West.   

The aim was to increase premium subscriptions and strengthen the advertising business by adding more exclusive content. Investors believed the model would work, sending Spotify stock up 110.4% in 2020. However, these acquisitions have yet to convert into material benefits, causing some doubt about the business’s value, according to Citi analyst Jason Bazinet. Consequently, in a bearish move, Citi downgraded Spotify from ‘neutral’ to ‘sell’.  

“If we were to see a material positive inflection in-app downloads or Premium subs (from higher gross adds or materially lower churn), we would alter our view,” said Citi. “But, our fear is that if podcasting doesn’t provide a way for Spotify to shift away from music label dependence, the Street may reassess the underlying value of the business. And, that would be bad for Spotify’s multiple and equity value.”   

“Among four subscription-based stocks – Spotify (SPOT), Roku (ROKU), Netflix (NFLX), and SiriusXM (SIRI) Spotify is the only firm where [Wall Street’s] long-term forecasts (through 2023) do not comport to the prevailing valuation,” added Bazinet.  

Conclusions  

One of the most baffling things to note is that despite having 144 million premium subscribers as of September 2020 and generating nearly $2 billion a few months before that, Spotify still struggles to make a profit. Spotify is scheduled to release its quarterly earnings on February 3rd. We are all sitting on the edge of our seat, dying to know what Spotify’s numbers show.