Shares of Spotify (SPOT) recovered losses that followed a bearish call from Evercore, ending slightly higher for the session Monday. Evercore analyst Kevin Rippey wrote in a note to investors that the stock’s recent rally is representative of “an overly opportunistic view” as the company faces higher publisher rates, intensifying competition, and a limited potential for podcasts to bring in revenue.
“We simply do not see a path by which [Spotify] can generate the level of gross profit demanded by Street estimates over the medium-term,” he wrote.
Evercore downgraded Spotify to underperform, and slashed its price target on shares from $125 to $110.
With regards to the higher publisher rates, the issue can be traced back to Spotify’s appeal of the Copyright Royalty Board’s decision to raise royalty rates over a five-year period. The music streaming service recently claimed that it overpaid songwriters and publishers. Rippey thinks that “more caution is warranted” on this issue because Spotify may simply not win the appeal.
On competition, he makes the case for why investors are not paying enough attention to competition from other streaming services, particularly abroad. As of March 31, Spotify boasted 100 million subscribers across 79 markets. But Rippey notes SensorTower data shows that at the country level, competition is far more intense than suggested by global aggregates.
“[In a scenario where SPOT was to leave any given market, consumers would likely quickly switch to a close alternative, resulting in a far smaller impact to the labels than implied by headline numbers,” Rippey says. “As a result, we see SPOT’s leverage over the major labels as less than many bulls suspect and limits our confidence that SPOT can force any material concessions from the labels in potential 2019 or 2021 rate negotiations.”
As for podcasts, Rippey says listening numbers are too small to lift the key metric of gross margin.
Despite these points of caution, most Wall Street analysts who cover the stock are bullish, with more than 20 “buy” ratings. Shares of service are up more than 30% for the year.
Pamela Granda is a producer on Yahoo Finance’s closing bell show, The Final Round. Follow her on Twitter.