Spotify is a 'unique opportunity' to invest in an industry that's set to triple over the next decade (SPOT)

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Spotify is a 'unique opportunity' to invest in an industry that's set to triple over the next decade (SPOT)

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Spotify

• Spotify is set to reap the rewards of a quickly growing music subscription industry, Morgan Stanley says.
• Consumer spending on recorded music has slumped in recent years, but Spotify is "leading a renaissance."
• The bank is bullish on Spotify, which went public in April, with a price target of $190. Morgan Stanley was a lead bank on Spotify's non-traditional direct public offering. 
• Follow Spotify's stock price in real-time here.

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Consumer spending on recorded music was decimated by the internet, but as the sector starts to rebound, it could propel Spotify to new heights, Morgan Stanley says.

"We see Spotify leading a renaissance in consumer spending on music," analyst Ben Swinburne told clients Monday. "It is the market share leader with a near global addressable market and has already achieved meaningful scale."

Morgan Stanley was a lead bank on Spotify's non-traditional direct public offering. 

Here's just how dramatically consumer spending dropped off from the late 1990's into the current century. You can see subscription spending kick in more recently, decimating downloads and physical sales while returning the sector to growth. That's the renaissance Spotify is driving, according to Morgan Stanley.

RIAA via Morgan Stanley Research

"If the paid streaming market can grow 3.5x by 2028, the labels will likely be thrilled at their revenue growth. If Spotify can garner 40-45% of that market, it will almost certainly drive healthy if not outsized returns and ultimately share outperformance," said Morgan Stanley.

The bank estimates that Spotify currently controls about 46% of the market share for streaming music, but warns that could fall to 40% as the industry expands by 2022. Still, there's plenty of room left to run, as the average US consumer still spends more hours per month on both traditional radio and Netflix, 54 and 42 hours, respectively, with Spotify coming in at third place with 40 hours per month.

Spotify is scheduled to release its first earnings report as a public company on Wednesday, May 2, after the closing bell, providing an update on its financials as well as user growth and engagement.

Shares of the company have fallen 3% since its IPO on April 3.

"We see a unique opportunity to invest in the leading streaming provider already operating at nearly global scale,"said the bank.

"Relative to investing in the content (labels), Spotify (as the only pure play distributor) offers greater upside — and greater risk. We are encouraged by Spotify's rising engagement levels, led by its curated playlists, falling churn, and leading market share position."

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SEE ALSO: There's one big difference between Spotify's users and those on Google, Apple, and Amazon streaming products — and it's a good sign for Spotify

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April 30, 2018 at 10:39AM