Spotify (NYSE:SPOT) saw a negative market reaction after analysts at Redburn Atlantic downgraded the company to Neutral. Last week, the streaming platform announced the launch of its audiobook, which was met with excitement, but Redburn doesn’t share the same optimism. As a result, it lowered its price target to $160 from $170.
Analyst Agnieszka Pustula noted that the company’s new audiobook offer could dilute its gross margin. More worrying is the belief that it could also elicit strong responses from competitors like Amazon (NASDAQ:AMZN), which runs the audiobook platform Audible.com, as well as Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG).
In a note to investors, Pustula said, “The immediate audiobook royalty costs should hit some €80M for launching in the UK and Australia, with another €180M for launching in the United States: In total, this could erase 200 [basis points] of gross margin. Furthermore, we estimate that new subscribers that immediately take up audiobooks would generate negative gross margins.”
For Spotify, the move is geared toward increasing its market share and expanding its product offerings. To boost interest in the feature, the firm announced that premium users in the UK and Australia can listen to 15 hours of audiobooks at no extra cost. However, the analyst predicts the platform may be forced to increase subscription prices by some 15 – 21% later, which may be unattractive for users who don’t listen to audiobooks.
Is Spotify a Buy, Sell, or Hold?
Turning to Wall Street, analysts have a Moderate Buy consensus rating on SPOT stock based on 17 Buys, eight Holds, and zero Sells assigned in the past three months, as indicated by the graphic above. Nevertheless, the average price target of $176.95 per share implies a 13.33% upside potential.
