Credit Suisse Thinks Spotify's Expectations Are Too High

Late last week, Credit Suisse initiated coverage of Spotify Technology SA (NYSE: SPOT) on the bearish side, saying the streaming service needs to “face the music” that expectations for long-term subscriber levels are too high.

The Analyst

Credit Suisse analyst Brian Russo on Friday started Spotify with an Underperform rating and $120 price target.

The Thesis

Long-term consensus subscriber estimates are too high and it will be tough for the company to get margins that meet consensus expectations, Russo wrote in last week's note.

The total addressable market is big, but Russo says the firm sees music streaming moving more toward household subscriptions, rather than individual plans, which puts Wall Street estimates for how many people will sign up for Spotify higher than Russo thinks reasonable.

Even if Spotify keeps its current market share of about 31 percent – tough against competition from Apple Inc. (NASDAQ: AAPL), Amazon.com, Inc. (NASDAQ: AMZN) and Alphabet Inc. (NASDAQ: GOOGL)’s YouTube – consensus forecasts for subscribers would mean half of all households in North America and Latin America would have to pay for streaming music by 2023.

“This seems aggressive to us given intense competition and the popularity of free music services, and our longer-term SPOT sub forecast is below consensus,” Russo wrote.

Russo noted that regulatory concerns for the big tech companies and a shift in leverage toward music content owners (and away from distributors) also don’t bode particularly well for Spotify.

Price Action

Spotify's stock was trading up about 1 percent at $139.96 at publication time Monday.

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