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Analysts assess moves to benchmark Spotify against Netflix ahead of IPO

Analysts are divided over moves to benchmark Spotify AB against video streaming platform Netflix Inc. in order to determine a potential valuation for the music streaming giant after it issued its first ever guidance ahead of its April 3 public listing.

In a March 26 filing, Spotify Technology SA projected shrinking losses and higher margins, despite slower revenue and premium subscriber growth for 2018, having warned investors in a February prospectus that significant losses meant the company "may not be able to generate sufficient revenue to be profitable."

The company's guidance said revenue would grow to between €4.9 billion and €5.3 billion this year, representing sales growth of about 20% to 30% year over year, compared to 39% growth the prior year.

Despite this, better terms on new licensing agreements as the company grows means Spotify expects to lower its operating losses to between €230 million and €330 million this year, down from €378 million the prior year. The company believes gross margins could grow as high as 25%, from 21% in 2017.

Spotify also forecasts it could close the year with as many as 96 million paid subscribers, up 36% from last year, compared with the 46% year-over-year increase to 71 million in 2017. The company projects it could reach as many as 208 million monthly active users, or MAUs, up 32% year over year, which represents a faster growth rate compared to the 29% increase to 159 million in 2017.

Spotify's public listing follows a major sell-off on March 27 in the U.S. tech sector of the so-called 'FANG' stocks of Facebook Inc., Amazon.com Inc., Netflix and Google Inc.-parent Alphabet Inc., which resulted in some of the biggest falls in years due to unease over their use and handling of user data. Facebook was down 5% and Amazon fell by 4%, while Netflix was 6% lower and Alphabet was off by 4%.

Even so, Joakim Dal, investment manager at GP Bullhound, believes Spotify's dominance in the hyper-competitive music streaming industry, along with Netflix's global reach, makes the California-based video platform its closest public comparable.

"[Spotify] is a leading company in a growing market with a well-recognized brand," Dal said in an interview, adding that this would make Netflix "the only true comparable we have out there."

And with its share of the music streaming market estimated at more than 30%, CMC Markets analyst Michael Hewson described Spotify in a March 27 research note as "the Netflix of the audio streaming world," noting its comfortable lead ahead of rivals Apple Music and Amazon.

The streaming platform's leading position earned it a valuation of $8.5 billion in June 2015 after raising $526 million in funding. Hewson said initial indications suggest a valuation for Spotify in the region of $20 billion when it comes to market, while GP Bullhound, a technology investment bank and partial Spotify owner, projects Spotify's growth could translate to a market value of at least $55 billion by 2020.

That said, Hewson believes the expected initial pricing for the IPO seemed "rather high" for a company that has yet to make a profit and whose ability to generate profits is only likely to get "squeezed further" by Apple Music and Amazon's deeper pockets and multiple revenue streams.

"Quite simply it does not have the scale or diversity of Apple or Amazon and while it currently holds a sizeable lead in terms of market share, profits could be quite a while in coming, given that the more users it gets the more royalties it has to pay," Hewson wrote.

Cenkos Securities analyst Alex DeGroote was equally skeptical about Spotify's financial outlook and expressed his doubts about comparisons to Netflix, given that the economics of the music industry are increasingly moving towards live touring and away from the distribution of recorded music.

Adding to that, the outlook for streaming platforms on the public markets thus far has been far from rosy. Severe stock slides over the years at Pandora Media, along with Deezer's aborted IPO in 2015, mark some of the major blows to the industry.

"I'm not sure Netflix is the right comparable," DeGroote said in an interview.

"I can see why some make the parallel with Netflix in terms of subscription revenues but I would question whether or not the Netflix or over-the-top proposition is the same as music streaming," he concluded.

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