Jefferies is bullish on streaming stocks

Jefferies initiated coverage on Spotify (NYSE: SPOT), Universal Music Group, and Warner Music Group Corp. (NASDAQ: WMG) with Buy ratings in a note Thursday, highlighting their strong growth prospects within the rapidly expanding music streaming industry.

The investment firm said that Spotify, in particular, has emerged as its top pick, driven by its robust growth trajectory and compelling valuation.

"We are increasingly confident in SPOT's ability to comfortably deliver sustainable 15%+ rev growth over the next 3 years," Jefferies analysts stated. " Underscoring our confidence in 15%+ sustainable rev growth is our view that music is about to undergo a multi-year repricing."

The investment bank anticipates that Spotify can achieve consistent price hikes, leading to margin expansion and significant revenue growth over the next few years. Moreover, the company's diversification into areas such as audiobooks and podcasts is expected to further drive profitability.

Jefferies believes that Spotify's current valuation is attractive, given its long-term growth prospects. The stock is projected to reach $385 per share based on sustained revenue growth, expanding free cash flow margins, and a reasonable valuation multiple.

While UMG and WMG also hold promise due to their roles as leading music labels, Spotify's unique position as a dominant streaming platform offers a more direct exposure to the industry's growth potential.

Even so, Jefferies views the music labels as a great way to play music streaming industry growth, which they "estimate to be a ~$28.5B market growing at an 11%+ 5YR CAGR."

"We believe UMG is better positioned over the long-term," said Jefferies, adding that its current entry point is attractive.

By Sam Boughedda

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