Spotify (SPOT)

Spotify (SPOT) is one of the most popular music and podcast streaming services. The company’s stock has taken a beating recently, falling 17% in the last five days and 20% in the last three months.

The decline in the stock price has been fueled by the announcement that former U.S. President Barack Obama and Michelle Obama’s media company, Higher Ground, is abandoning its exclusive podcast arrangement with Spotify when the deal expires in October.

According to reports, Higher Ground is in talks with several possible partners, including a multimillion-dollar agreement with Amazon’s (AMZN) Audible.

The Obamas’ decision not to renew their agreement is a setback for Spotify. As part of its aggressive expansion into podcasting, Spotify has spent billions to buy the exclusive rights from big names like Prince Harry and Meghan Markle, Joe Rogan, and Kim Kardashian.

Increasing Rivalry

The music streaming market is still in its nascent stage. The industry is becoming very competitive as a result of numerous new firms entering the market.

Deezer, a French music streaming platform, recently filed for an initial public offering (IPO) through a special purpose acquisition company (SPAC). As a result of the IPO, Deezer will be able to strengthen its position as a major, worldwide, independent audio streaming service.

The new competitor could increase competition in the streaming arena, causing Spotify to lose market share to Deezer.

Upcoming Q1 Results Could Be a Catalyst

Spotify remains the most popular audio streaming service and reported solid fourth-quarter results. Revenues increased 24% year-over-year, while monthly active users (MAU), one of the company’s key performance indicators, also jumped 18% year-over-year to 406 million.

As Spotify is expected to release its Q122 financial results this week on April 27, a solid earnings report, favorable management commentary, and an upbeat forecast could help the stock regain lost ground.

Wall Street’s Take

Ahead of the Q1 earnings results, Monness analyst Brian White feels that Spotify is benefiting from a favorable secular trend and a wide selection of audio offerings, but he is concerned about macro instability.

Commenting on revenues, White anticipates Spotify to post strong growth in its Ad-Supported business, owing to its strength in the digital advertising space and the company’s “improved capabilities.”

However, “increased inflationary pressures” and “greater geopolitical uncertainty” are expected to have a negative impact on the company’s premium subscriber growth, according to the analyst.

Based on his thesis, the five-star analyst maintained a Buy rating and a price target of $240 per share. This implies 117.8% upside potential from current levels.

The Street is cautiously optimistic about Spotify, with a Moderate Buy consensus rating based on 15 Buys, eight Holds, and one Sell. At $224.26, the average SPOT price target suggests 103.5% upside potential from current levels.

Bottom Line

Spotify has a strong presence in the streaming space, as well as in digital audio advertising. It has a robust lineup of content that should keep people interested in using the platform. As a result, Spotify’s user base may continue to grow in the foreseeable future.

Increased competition and lackluster margin growth, on the other hand, could be a sore point in the quarter.

Nonetheless, the stock appears to be a good bet, with triple-digit upside potential.