Pivotal downgrades Spotify, says path to profitability will require patience

Published Thu, Apr 28 20226:17 AM EDT

Spotify shareholders will need patience to see the path to profitability, research firm Pivotal said one day after the streamer released its most-recent quarterly report. Analyst Jeffrey Wlodarczak downgraded shares to hold from buy, saying in a note to clients Thursday that rising inflation hurts the outlook for the stock, though he expects material user growth remaining for the company. "While investing to drive future subscriber/ARPU growth is not necessarily a bad move operationally, deferring cash flow unsurprisingly was viewed quite negatively by the market (as we saw with SELL rated NFLX in 1Q and SELL rated ROKU in 4Q)," Wlodarczak wrote. "While we believe there remains material user growth left for Spotify many investors question whether Spotify will ever be able to generate significant lasting profitability." Pivotal also slashed the price target more than half to $110 per share from $235. The new price target is still 13% above where shares closed on Wednesday. The downgrade came one day after Spotify shares tumbled more than 12% on the back of the company's latest quarterly figures. Spotify reported 282 million euros in ad-supported revenues , missing a FactSet estimate of 304.1 million euros. Guggenheim Securities' Michael Morris also downgraded the stock to neutral on Wednesday. "Based on a lack of upside to warrant a Buy on our new target price + delays in profitability that will require patience / faith from investors we are downgrading the stock from Buy to Hold," Wlodarczak wrote. Still, Pivotal believes the long-term outlook for the company appears "reasonable." Spotify has a long-term gross margin target of 30% to 35%. "If one thinks (as we believe long term) that SPOT can generate decent financial returns ... then the stock appears quite cheap at current levels (1.2X revenue) with the company generating modest free cash flow and $3.4B in net cash," the analyst wrote. "But again investors will have to be patient." Spotify's stock rose nearly 2% in Thursday premarket trading. —CNBC's Michael Bloom contributed to this report.

The Spotify logo on the New York Stock Exchange, April 3, 2018.

Lucas Jackson | Reuters

Spotify shareholders will need patience to see the path to profitability, research firm Pivotal said one day after the streamer released its most-recent quarterly report.

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