Spotify (NYSE:SPOT) was downgraded to Neutral from buy at Citi in a note Friday, with analysts maintaining a $190 per share price target on the stock.
Analysts told investors that while they like SPOT’s strategy and execution, they no longer believe the risk-reward is compelling.
“When we look at consensus estimates, we see a few reasons to be a tad more cautious,” said the analysts. “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.”
On paid gross add, the analysts explained that over the past six years, the conversion of Ad-supported MAUs to Premium gross adds has declined, and The Street expects this to continue.
“However, it means Spotify’s model is becoming less efficient as growth shifts to less developed markets,” the analysts added. “This may pose some risk to Premium gross adds unless conversion rates from the Ad-supported to Premium service improve.”
