March 4, 2024
Spotify Stock Downgraded, User Retention a Big Concern

Citi downgraded Spotify (SPOT) stock from “buy” to “neutral” with analysts citing revenue and user retention concerns. With the drastic change in Spotify’s business model, including subscription price increases and an emphasis on developing podcasting content, there are questions about the effectiveness of these strategies.

Yahoo Finance’s Cena Smith and Bradley Smith report on this story and what changes Spotify might consider to capitalize on music and streaming trends.

For more expert insights and the latest market action, click here to watch this full episode of Yahoo Finance Live.

video transcript

Cena Smith: Okay, let’s move on to another proponent today. And Citi downgraded Spotify from buy to neutral, but left the price target unchanged. You’re looking at about 1 and 1/2% pressure this morning. The analyst also cited concerns about the company’s ability to increase average revenue per user, citing concerns about the number of users who stop using the platform, also known as churn.

Now, the company is saying that the risk-reward on Spotify’s strategy and implementation is no longer binding. A lot of it is because of this valuation call, the last line there. The risk-reward setup is no longer effective, at least in Citi’s eyes.

When it comes to some of the changes that Spotify has made here over the last several quarters, we talk about the fact that they’ve spent so much on their podcast business, trying to grow that by investing in their podcast business. Are. We’ve certainly seen a little bit of a change or variation in that strategy. They have also announced some price hikes here and are making every possible effort to increase their profitability. Yes, when you talk about the return to profitability here the past results were impressive, the first time they made a profit in almost a year. But to keep that momentum going, City will have to take a number of risks.

Bradley Smith: Yes, in their latest report, which you were mentioning just a moment ago, profits were up 18% year over year. That gross margin came to about 26.4%. But can I just say I’m jealous of all the little guys coming out with their Spotify raps right now? I don’t have any cover. I have Apple Music. I mean, yes, you got–

Seana Smith: You don’t have Spotify?

Bradley Smith: I don’t have Spotify. So I don’t even know what my sound town is.

Cena Smith: Well, we never had this conversation.

BRADLEY SMITH: I have no idea–

Cena Smith: Well, that’s the only reason to switch. Maybe you can help with customer numbers here.

Bradley Smith: I think so. I think so too. I mean, it would be– I didn’t even get a chance to talk about this new Andre 3000 album with the guys there.

We’ll do that here another day. I’ve got a six-point thesis on that. Maybe I’ll tweet it.

But at the end of the day, I think it’s really behind some of the creativity that they’re able to see not only from the artists, but from the podcasters here. Podcasts are so massive that they are also able to come up with different forms of spreading that message beyond just the podcast. Spotify, they were very smart to get involved so early. However this is a lot of expense that comes with it when you are trying to make sure you have the right personality.

For Apple, what they’ve been able to do well is just create a platform that people can upload to. And so at the end of the day, I think for podcasting as a strategy, it’s still going to come down and, in a way, depend on how the strength of the music catalog plays out here. And this is where Andre 3000 actually, dropped the mic or dropped the flute, this is the moment that we just saw–

Cena Smith: We’ve talked a lot–


Cena Smith:–both of us, about Andre 3000.

Bradley Smith: I’ve already given you my dissertation.

Cena Smith: I know. I know. And I have yet to listen to it, but maybe it will be my homework this weekend.


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