Spotify shares sank 7.4% to $317.10 on Friday (Jan. 15) after a Citi analyst downgraded the stock after concluding that the streaming service’s podcasts have not had a positive impact on subscriber growth. The price recovered slightly over the day and closed at $317.81.
Citi analyst Jason Bazinet believes Spotify is the only one of four subscription stocks — Netflix, SiriusXM and Roku are the others — with a price that’s out of sync with its valuation. “We suspect this disconnect stems from recent enthusiasm around Spotify’s recent podcast pivot,” he wrote. Bazinet dropped his rating from neutral to sell while raising the price target from $270 to $310, 2.2% below Friday’s closing price.
Spotify’s share price was already in retreat, dropping 12.5% from an all-time high of $370.95 reached on Wednesday (Jan. 13), however. Some experts would argue it’s still too high. The 25 analysts covering Spotify have a median price target of $298.53 with a high of $425.90 and a low of $141.30, according to Refinitiv.
1) The three leading audio streaming companies — Spotify, Apple and Amazon — are pushing hard into podcasts. If turning a music service into an all-around audio service attracts subscribers and reduces churn, record labels and publishers will benefit.
2) Regardless of how its podcasts perform in the next year or two, Spotify has the resources to see its strategy through. It had €1.18 billion ($1.43 billion) on its balance sheet on Sept. 30, 2020, enough for more acquisitions and production expenses for original content.
3) Spotify lacks a bundle. Apple can fold a podcast subscription into Apple One or offer a standalone music-podcast bundle. Amazon has the opportunity to bundle podcast and music subscriptions.
Also on Friday, news broke that Apple is planning a podcast subscription service that would compete with a similar offering Spotify is reportedly mulling over. The Information’s report, corroborated by Bloomberg, reveals Apple is intent on following Spotify’s lead in switching its focus from a music-focused platform to one with both music and spoken word. Apple already has a popular podcast app but does not own the content it distributes. Amazon, often overlooked in discussions about audio streaming, already has a podcast subscription business — $4.99 per month or $34.99 annually — through its acquisition of podcast producer Wondery in December 2020.
Becoming an audio platform is a sensible and unavoidable move. Podcasting has the opportunity to expand Spotify’s listening hours, make the product stickier (less churn makes the average user more valuable) and improve gross margin (not because labels will lose negotiating power but because owned podcasts offer advertising opportunities). Since labels no longer give streaming services exclusives, podcasting is the favored format for luring listeners with titles that are unavailable elsewhere. And while streaming services are uninterested — thus far — in becoming record labels, they have quickly built in-house podcast production.
With Apple and Amazon on its heels, Spotify might struggle to maintain its top position in the market. Not only must it compete on music features, podcasting could drag it into a margin-killing pricing fight. Amazon continues to make a push in music streaming with Amazon Music HD, a high-definition tier for only $12.99 per month in the U.S. for Prime members, and leverages its popular Echo smart speaker with less expensive streaming options. Apple includes Apple Music in Apple One, a bundle with Apple TV+, its Apple Arcade game package and iCloud. It could fold a podcast subscription into Apple One or offer a standalone music-podcast bundle. Spotify is a standalone company facing two of the world’s largest tech companies. At best it can continue to partner with other companies that have no streaming counterpart like Hulu, with which it once had a $9.99 available in the U.S.
The three streaming leaders have taken varied approaches — buy or build — to enter the music and audio markets. Apple is creating its own podcasts but bought Beats Music and re-built it into Apple Music. Although Spotify and Amazon Music were built from scratch, both companies have used established brands to kickstart their podcasting businesses. Spotify acquired The Ringer and Gimlet and licensed The Joe Rogan Experience; Amazon acquired Wondery, producer of shows such as Death of a Starlet, and has an exclusive with the popular music-based show Disgraceland. Back in 2008, Amazon broke into the audiobook market with its $300 million acquisition of Audible.com.
Other companies have a good foothold in podcasting. iHeartMedia’s original shows include The Ron Burgundy Podcast, in which actor Will Ferrell reprises his character in the movie Anchorman; comedian Chelsea Handler’s Life Will Be The Death of Me and Stuff You Should Know. NPR has a formidable lineup of interview and news shows. Pandora has an exclusive podcast, 17 Weeks, from parent company SiriusXM and UNINTERRUPTED, a brand founded by NBA player Lebron James, and another about rap icons Wu-Tang Clan. And The New York Times has the popular show The Daily and recently acquired Serial Productions, the company behind the hit podcast Serial.
Investors’ enthusiasm about podcasts helped launch Spotify’s share price 109.3% over the last 12 months, from $151.84 to Friday’s close of $317.81 — for a market value of $60.3 billion. Since its pandemic low of $109.18 on March 16, Spotify’s share price is up an astounding 239.8%. Both gains far exceed the broader market: over the last 12 months, the New York Stock Exchange and the tech-heavy Nasdaq have climbed 5.3% and 38.9%, respectively. Spotify has even bested the top on-demand video streaming company during a year of pandemic-fueled growth: Netflix, a main benefactor of shelter-in-place orders, is up 47.1% over the last year.
Spotify versus Apple and Amazon isn’t necessarily a story of David versus two Goliaths; Spotify is a goliath in its small section of the e-commerce market. For a decade it focused on building the best music service — no in-house ticketing, livestreaming or record label. The focus has changed to being the best audio streaming service, and the ultimate goal of gaining subscribers remains.