Spotify’s renegotiations with the major music labels are happening next year. Here’s another Wall Street analyst who doesn’t seem too concerned.
MKM Partners analyst Rob Sanderson wrote a memo to clients saying that most of Wall Street seems overly focused on Spotify’s contract renewals. “We think [the renewals are] less significant than most investors believe,” the memo flatly stated.
Sanderson believes music labels will treat Spotify fairly during the renewal process. That’s yet another Wall Street assessment that counters somewhat sensationalistic reports of hard renegotiations ahead.
Just last month, Guggenheim analyst Mark Morris predicted that Spotify’s renegotiations with the major labels will significantly improve the company’s gross margins.
Along the same lines, Sanderson sees negotiations happening with leverage on both sides — and lots of interest to work out reasonable terms. Sounds positive for Spotify, though that may not be enough to reach targets of a 35% gross margin. That’s not to say Spotify won’t get there, just maybe not by next year.
In terms of value-adds, Sanderson believes labels could start shifting more of their marketing dollars to promoting artists on streaming services instead. “Labels historically allocate 15% to 20% of revenue to marketing,” Sanderson wrote. “All of this value could shift to streaming platforms without changing the economic model of labels.”
Sanderson also spent some time comparing Spotify to Netflix, but says that gross margins will be a more significant focus for Spotify than for Netflix. Spotify’s ad-free entry tier, plus the freedom from having to churn out original content gives Spotify an edge in performance — at least according to Sanderson’s analysis.
Subscriber growth is the key focus for Spotify and Sanderson also says the company’s premium-tier subscription is less-volatile than Netflix’s single offering.
Sanderson has placed a buy rating on Spotify with a $245 price target.
That’s quite a projection, given that Spotify’s stock currently sits at $151.50 at the time of writing, up 1.45% from the previous day. September and October sell-offs have not been kind to the stock, which saw a peak price of $194.69 at the end of August.
Some might say that Spotify it outright tanking, though they’re not alone. The entire technology sector is down substantially since yesterday, causing the Dow to plunge 831 points. That was the second-biggest drop of the year, with the index losing around 3.15% of its value.
Tech stocks suffered the most and continued their decline into today’s trading, which has affected SPOT’s value.