Spotify Technology SA (SPOT), a pioneer in the booming music streaming industry, looks like everything investors could want in a company. The Sweden-based firm boasts a rapidly-growing, youth-focused, cloud-operated, subscription-based music platform, and is run by a visionary founder. There’s one key issue, however, which is that Spotify is likely to get crushed by arch-U.S. rival Apple Inc. (AAPL), and another international player, according a handful of bears on the Street, as outlined by Barron’s.

Since its public debut in April 2018, Spotify shares have had a rocky ride, trading just above their initial IPO price of $132 on Thursday. The tech company’s current market value stands at $24.5 billion, roughly 40 times smaller than Apple’s $968 billion market capitalization, yet rakes in more than the annual revenue of the entire global recorded-music industry, per Barron’s. After having successfully disrupted the music industry, Spotify’s bulls are confident that it can lead in other growth markets, such as podcasting, a rapidly expanding business expected to see revenues in the U.S. more than double to $659 million from 2017 to 2020.

Share of the Music Streaming Market Outside China

  • Spotify: 31%
  • Apple: 17%
  • Amazon: 12%
  • Sirius XM Holdings (Pandora): 11%

Source: Credit Suisse, per Barron’s

Competitive Pressures

In just a few years, Apple’s shift to wean reliance off of hardware sales and focus on software and services, has managed to win it the same U.S. market share in the music space as Spotify. Meanwhile, abroad, Tencent Music Entertainment Group (TME), in which Spotify now owns a minority stake, dominates in the key Chinese market. Alphabet Inc.’s (GOOGL) YouTube platform also stands as a competitive threat, with one survey showing that free YouTube videos made up almost half of the time people in 18 countries spent listening to music.

Outside of China, Spotify leads by a healthy distance with an estimated 31% market share, followed by Apple, at 17%; Amazon.com Inc. (AMZN), at 12%; and Sirius XM Holdings (SIRI), which now owns Pandora, at 11%, wrote analysts at Credit Suisse. Analyst Brian Russo, who rates Spotify at underperform with a $120 price target, adds that music labels have every incentive to maintain as much competition amongst the rival distributors as possible. Evidence of this heightened competitive pressure is becoming more visible. Earlier this year, the European firm filed a complaint with EU antitrust regulators indicating that Apple is unfairly charging Spotify to use its App Store. In a rebuttal, the iPhone maker said that Spotify wants to get free access to services that other firms pay for, per Barron’s.

Licensing Costs

Another key issue for Spotify, which has yet to turn a profit, is the high costs to license its music. While revenue has been rising and the platform has seen paid subscribers grow to 96 million, the company pays out nearly 70% of its revenue to content costs.

“Spotify’s business model at this stage is really tough because the bulk of the revenue they’re generating goes to the labels and the artists,” said David Marcus, CEO of Evermore Global Advisors. “While [the company] has a humongous valuation, they now have to figure out how to get a bigger piece of the pie.” Marcus recommends betting on the content producers themselves, including massive music labels Vivendi’s Universal Music Group, Sony’s (SNE) Sony Music division and privately held Warner Music Group.

Negative headwinds aside, some of Spotify’s loyal fans go as far as to call it the next Netflix Inc. (NFLX), with analysts such as RBC Capital Markets’ Mark Mahaney painting the picture of the company as an underdog among the tech titans. With an estimated 38% of the world still listening to music for free, a large part of the market is still untapped. Even Spotify’s bears expect its global paid subscribers to grow over 100% in five years.

Looking Ahead

Investors will get a fresh snapshot of Spotify's health when it reports earnings results for the three month period ended March on Monday, April 29. The consensus estimate calls a loss of $0.39 per share, compared to a wider loss of $1.16 a year ago, and a 25.4% revenue gain to $1.64 billion for the quarter, per Yahoo Finance. In February, the company forecasted a deceleration in growth of monthly active users and paid subscribers over the coming year.