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Spotify Rises Following Second Rating Upgrade In As Many Days

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Credit Suisse’s longer-term concerns remain as Spotify might be challenged to meet expectations

Shares of Spotify (SPOT) are on the rise on Wednesday after Credit Suisse analyst Brian Russo upgraded the stock to Neutral as he believes a third quarter subscriber miss is now priced in at current levels. Voicing a similar opinion, his peer at Evercore ISI also raised his rating on the shares to In Line on Tuesday, adding that the risk/reward is “increasingly balanced.”

SUBSCRIBER MISS NOW PRICED IN:

In a research note to investors, Credit Suisse’s Russo upgraded Spotify Technology to Neutral from Underperform, with an unchanged price target of $120. With a “negative narrative” gaining momentum since the summer, expectations for a third quarter subscriber miss are now priced into the stock, Russo contended. The analyst also pointed out that Spotify shares are down 28.6% over the past eight weeks and short interest in the name is now at historical highs. While Russo sees a balanced risk/reward profile in the near-term, his longer-term concerns around Spotify’s subscriber and revenue growth remain as he continues to believe Spotify will be challenged to meet Wall Street expectations for subscriber/revenue growth given a reliance on both penetrating older consumers in developed markets and lower-value consumers in emerging markets.

RISK/REWARD ‘INCREASINGLY’ BALANCED:

On Tuesday, Evercore ISI analyst Kevin Rippey had also upgraded Spotify to In Line, with an unchanged price target of $110. The analyst noted that his bearish view of the name had been grounded in the notion that when the stock was trading at about $150, the market was taking an “overly optimistic” view of the company’s ability to drive gross margin improvement. While he still contends that the path to substantial gross margin expansion for Spotify is unclear, with the stock down over 30% from recent highs, the opportunity related to shorting the name has diminished.

Rippey acknowledged that he “would not be totally surprised” to see the shares remain under pressure as the market revaluates companies demonstrating attractive revenue growth but beset by unclear paths to meaningful profitability. However, he feels equally likely that “sudden relief rally” from a technically oversold position leads the stock higher, at least temporarily.

PRICE ACTION: 

In morning trading, shares of Spotify have gained about 2% to $114.58.

Originally Posted on October 2, 2019 – Spotify Rises Following Second Rating Upgrade In As Many Days

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