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Spotify Technology (SPOT): Breaking Down Gabelli’s New Neutral Call

Gabelli's John Tinker sees an expanding market for Spotify, but likewise is wary that two-third of the company's revenues are feeding royalties.


Gabelli analyst John Tinker is out with new coverage on Spotify Technology (NYSE:SPOT), where the analyst on one hand sees the biggest music streaming subscriber platform in the globe; and on the other hand, he wonders if scope can yield better margins.

As such, the analyst initiates a Hold rating on SPOT stock with a $130 price target, which implies a 12% upside from current levels. (To watch Tinker’s track record, click here)

Following Spotify’s official public listing on the New York Stock Exchange, the analyst bets the tech player can achieve €5.2 billion in revenue along with negative EBITDA of (€232 million) this year. Additionally, the analyst forecasts a 2019 PMV of €130/€160 per share for SPOT.

The bullish points for Tinker on Spotify boil down to these: “Growing market as mobile expands. New revenue opportunities with advertising revenues, charge record labels/artists for data to better target market. CFO Barry McCarthy was previously Netflix CFO and can explain why building the global platform and not focusing on short-term profits works.

However, there is a reason that even though Tinker sees more upside potential than downside that he is for now choosing to play it safe on the company: “Scale does not translate into higher margins as two-thirds of revenue continue to be paid as royalties. Commoditized business with multiple competitors; Apple is growing faster than Spotify and has a different business model whereby music does not have to be profitable on a standalone basis. Declining ARPU suggesting low pricing power,”

Bottom line, “The ‘thesis’ is that greater scale puts more pressure on the record labels to improve the 2/3 royalty revenue pay out. Universal Music, Sony, Warner Music and Merlin account for 87% of Spotify’s revenue – a tight selling group with extensive catalog who may be difficult to dislodge,” Tinker asserts.

TipRanks shows off early word is shining for the bulls when it comes to Spotify’s market opportunity. Out of 5 analysts polled in the last 3 months, 4 are bullish on SPOT stock while 1 remains sidelined. With a return potential of nearly 17%, the stock’s consensus target price stands at $173.00.