Despite a Downgrade from Evercore, Spotify’s Stock Recovers and Gains

Over the weekend, Spotify’s stock slid in after-hours trading.

The drop came following a bearish report from investment firm Evercore. Spotify’s shares had declined 3.6% in after-hours trading to $143.

Knocking the music streaming company’s stock from In Line to Underperform, analyst Kevin Rippey said investors had overstated Spotify’s ability to make money from podcasts as well as its services to musicians.  He slashed the company’s price target to $110.

Explaining why shares have rebounded this year, Rippey added that investors expect one of two outcomes.  Either the company will come out “way ahead” in licensing negotiations with the Big 3 labels – Warner, Sony, and Universal Music – or it will make “a bundle of money” from services which have previously accounted for none of its income.

So, Rippey continues, for the company to achieve Wall Street’s gross profit targets, either Spotify will have to take a more significant cut of song royalties from streams, or generate up to $650 million in “ancillary areas” by 2022.  These include Spotify for Artists and podcasts, among others.

Rippey added the company has also overestimated its potential market position in emerging markets.  These include India, the Middle East and North Africa (MENA), and Indonesia.

Stating that Jio and Gaana remain the current streaming music market leaders in the regions, he wrote,

In emerging markets like India, local players dominate the market.  This fragmentation leads to an understatement of how competitive streaming music is globally.

Spotify also remains in a tricky position in the United States.  Still behind Apple Music in subscriptions locally, the company could lose its battle with the Copyright Royalty Board (CRB).

Should the CRB uphold its ruling, Spotify will have to pay songwriters and publishers far more per stream.  This hike, says Rippey, would cut into the company’s income, which it hasn’t “embedded” into its estimates.

Investors largely ignored Evercore’s bearish report.  Today, Spotify’s stock closed at $150.11.  The company opened at $143.  On Friday, it closed at $148.31.