Fellow streaming and media giant Netflix may provide a roadmap for Spotify's future stock performance, according to one analyst.
Spotify's stock started trading on Tuesday in an unusual public offering — one that lacks many formalities, like a traditional roadshow, that help Wall Street figure out what to expect.
But Michael Morris, analyst at Guggenheim Securities, said that he expects Netflix's highly valued stock will guide investors.
Morris' bullishness note on the stock — published prior to the opening trade — was helped by the "win-win" scenario of helping both musicians and consumers.
"Spotify seeks to deliver maximum listening enjoyment to consumers through convenience, curation, breadth of content, and payment options (your time or money)," Morris wrote. "The value proposition to the artist is to strengthen the listener relationship through distribution, data access, and compensation. ... Spotify's focus on creating a virtuous cycle for consumers and artists and using technology to create curated experiences evokes a Netflix-like promise of significant global penetration potential."
And investors have shown they are willing to pony up for a promising business model, even in the competitive content business.
Netflix's price-to-earnings ratio — the amount of money that stock buyers pay compared with how much profit a company makes — was over 100 by the end of last year, and well over 200, on average, over the past five years. Compare that with Facebook — a P/E of about 62 over the past five years — or Apple — with an average P/E of about 14 during that time, according to FactSet.
RBC analyst Mark Mahaney also expressed optimism before the stock began trading, noting that Spotify may have an even larger data set than Netflix in terms of playlist personalization, in addition to a "very, very large" potential market.
Netflix and Spotify also share some common competitors in Apple and Amazon. But Atlantic Equities analyst James Cordwell echoed Mahaney's outlook on Spotify's data and market.
"Spotify faces stiff competition, but we believe its richer music data and singular focus will enable it to offer the best service in terms of music discovery — the key competitive differentiator," Cordwell said.