Spotify Technology SA (NYSE:SPOT) could suffer from overblown expectations, according to analysts at Citi, who have raised doubts about the music streaming business’s ability to sustain growth.
Analysts at the bank downgraded the company’s stock from ‘buy’ to ‘neutral’ on Friday, meaning they no longer recommend buying the company’s stock.
Citi analyst Jason B Bazinet said in a research note that, given the market’s high expectations for Spotify and the potential challenges faced by the business, the risk-reward ratio of investing in Spotify is "no longer" compelling.
He warned that Spotify’s stock price may suffer if the number of premium users does not meet market expectations, alluding to a possible “air pocket” in valuations.
Bazinet raised concerns about whether Spotify can increase its average revenue per user (ARPU), while reducing its churn rate, the percentage of customers who stop using the service.
He also questioned whether Spotify can keep adding more paid subscribers at an increasingly fast pace, especially in developing markets where price sensitivity is higher.
“While we like Spotify’s strategy and execution, we no longer believe the risk-reward is compelling,” Bazinet said in the research note on Friday. “When we look at consensus estimates, we see a few reasons to be a tad more cautious.
“Our concerns include: 1) expectations of rising ARPUs along with continued declines in churn; 2) paid gross adds continuing to accelerate even as the mix shifts to developing markets; and 3) a potential air pocket in the Street’s valuation calculus if Premium net adds falter.”