Streaming media plays have had an impressive run during the economic shutdown spurred by the Covid-19 pandemic. Through Monday’s close, Netflix shares had rallied 62% year to date, while Spotify Technology’s stock was up 75%.
But both stocks came under some selling pressure on Tuesday after a pair of downgrades from UBS analyst Eric Sheridan, who suggests the time has come to take profits.
In recent Tuesday trading, Netflix was off 1.4% to $518.22. Spotify was down 0.6% at $259.59, after being down more than 1% earlier in the session.
For Netflix stock (ticker: NFLX), Sheridan reduced his rating to Neutral from Buy, while maintaining his $535 target price. Netflix will report earnings after the close of trading on Thursday, and as Barron’s has noted, the focus will again be on subscriber growth. The company has projected 7.5 million net adds for the quarter. Sheridan on Tuesday increased his forecast to 9 million from 7.49 million. He expects results for the second straight quarter will show “a widespread benefit” from the current environment.
Sheridan also notes that “investor fears seem to have disappeared and the current stock price increasingly reflects many of the long-term business moat dynamics” of Netflix, including sustained growth in users and revenue and margin expansion. The company’s long-term story remains intact, he says, but he’d rather recommend the stock at a time when potential subscriber volatility, free cash flow dynamics and competition “are better reflected in the share price.”
For Spotify (SPOT), Sheridan cuts his rating to Sell from Buy, while inching up his price target to $204, from $189, still well below Monday’s closing level at $262.04.
Just three months ago, the analyst wrote that the podcasting opportunity could be a positive for the Spotify story—and so it has, with the stock up 47% over the past month. But he says the stock has now completely priced in the podcasting story.
“One key theme that has seemed to become a tenet of the bull case is that podcasting will materially alter supply costs dynamics with the music industry,” he writes. “We are skeptical that this will be the case.” He says podcasting is much more likely to broaden Spotify’s user base than to dramatically alter its content costs.
But the two downgrades were partially offset by bullish calls at competing firms.
BofA Global Research analyst Jessica Reif Ehrlich on Tuesday repeated her Buy rating on Spotify shares, lifting her price target to $357 from $185. While noting that the stock is up 129% since April 1, she continues to see “compelling exposure to an iconic, global but still relatively early stage streaming business with optionality from new initiatives,” including expansion in podcasts, a growing ad business, and general diversification away from high cost music content.
Barclays analyst Kannan Venkateshwar repeated his Overweight rating on Netflix shares Tuesday, upping his target to $550 from $420. “While Q2 expectations have run up significantly ahead of already high guidance, the key driver is likely to be Q3 guidance,” the analyst writes. “However, Netflix is one of the few content services with a full content slate which, combined with sports uncertainty, could continue to be a tailwind.”
