When it comes to streaming music giant Spotify Technology SA (NYSE:SPOT), there isn’t any shortage of bulls on Wall Street.
Pivotal Research is out there with a $200 price target. Canaccord Genuity and MKM Partners also both have $200 price targets on Spotify stock. Royal Bank of Canada has a $210 price target, while Raymond James has a $190 price target.
Spotify stock currently sits just under $160.
Thus, a lot of analysts think that Spotify stock is due for an approximate 20% to 35% move higher over the next several quarters, despite the stock already trading at nearly six times this year’s consensus revenue estimate.
Why? Because, according to the bulls, Spotify is doing in the music industry what Netflix, Inc. (NASDAQ:NFLX) did in the video industry, and that is creating an on-demand content subscription service that everyone and their best friend will subscribe to. Thus, Spotify stock deserves to trade at a Netflix-type valuation, according to the bulls.
But does this comparison to Netflix really make sense for Spotify?
No. Spotify has a lot more competition than Netflix ever had. Meanwhile, Netflix has original content, but there isn’t any exclusive content differentiation for Spotify. Plus, audio is so much easier to pirate than video, and audio is already free everywhere across the web.
For all these reasons, Spotify won’t become the Netflix of music. From this perspective, Spotify stock actually looks overextended at current levels.
Here’s a deeper look.
Lack of Original Content Is a Big Deal
The big difference between Netflix and Spotify is original content.
For all intents and purposes, Netflix got to where it is today thanks to original content. The launch of the first season of Stranger Things in the summer of 2016 served as a big turning point for this company. The widely loved sci-fi series kicked off a string of Netflix original hit after Netflix original hit.
The result? Super-charged subscriber growth, which has sparked super-charged stock growth. In the two years before Stranger Things, Netflix added roughly 30 million subs. In the two years since, Netflix has added 50 million streaming subs.
Meanwhile, before Stranger Things, Netflix stock was trading sideways below $100. Ever since, Netflix has torn through $100, $200 and $300 and now trades at $350.
In other words, it really was original content that pushed Netflix up and above everyone else in this space and made it a must-have service.
Spotify doesn’t really have original content. Nor will it ever.
Music, by and large, is free. Unlike movies where content is, at one point or another, hidden behind some exclusive paywall (either in theaters or exclusively on some streaming service), the overwhelming norm for music content is for it to launch on every service, paid and free, simultaneously.
Because of this dynamic, Spotify does not currently have nor will it ever amass an original content portfolio that is even close in size to Netflix’s original content portfolio. Music content is just too accessible, for free, through platforms like YouTube and SoundCloud.
And even if music does magically get locked behind some exclusive paywall, piracy in the music world is so easy that a lot of people do it, meaning such exclusivity really isn’t all that exclusive.
Competition Is Fierce
Without that big original content portfolio, Spotify doesn’t have any distinguishing feature which separates it from what has become an overly crowded, on-demand streaming music space.
Apple Music is actually outgrowing Spotify in the U.S., and all signs point to that service overtaking Spotify as the number-one paid streaming music service in the country.
Pandora Media Inc (NYSE:P) is gaining traction with its newly launched on-demand music service. Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) is behind YouTube Red, which has largely been a flop. But the tech giant also just launched YouTube Music, which some say is full of promise.
In other words, there is a ton of formidable competitors out there who offer essentially the exact same thing as Spotify. Why does Spotify win in a market where everyone is offering the same thing?
It won’t. Without exclusive content, the on-demand music streaming space will turn into a fierce price war with no real winner.
Bottom Line on Spotify Stock
Spotify is in the right space at the right time. But it isn’t following in Netflix’s footsteps because it doesn’t have the one thing that turned Netflix into a must-have service: original content.
Without original content, Spotify stock looks overvalued here and now. As such, today’s $200-plus price targets seem unreasonable. It actually seems more likely that Spotify stock hits $100 before it hits $200.
As of this writing, Luke Lango was long GOOG.