Music to a dip-buyer’s ears?

04/17/19
  • Spotify dropped on Monday after Amazon music service news
  • SPOT shares are up roughly 23% YTD
  • Earnings due in early May, 13 months after IPO

We’ve seen this movie—or, rather, heard this song—before. Digital behemoth—Amazon (AMZN), we’re looking at you, but also at Facebook (FB) and Netflix (NFLX)—announces its expansion into a new business, and existing stocks in said business immediately turn red.

That’s the story: Amazon killed the bookstore and is challenging all brick-and-mortar retail, Facebook killed MySpace (that’s what it was called, right?), and Netflix killed Blockbuster and is challenging traditional movie and TV studios.

The most recent example was music streaming service Spotify’s (SPOT) 5.4% intraday downturn on Monday following a report that AMZN was going to release a new music platform:

Spotify (SPOT) 12/31/18–4/16/19. Spotify (SPOT) price chart. Dipping, not diving, on AMZN news.

Source: Power E*TRADE


Shares recovered to close down only -4.4%, but the implication of the move seemed to be clear: Business could get tougher for SPOT.

Well, we’ll see. No business relishes enhanced competition, but it’s a fact of life, and SPOT investors may be encouraged (and traders intrigued) by what has happened after similar episodes over the past year.

While the idea that Amazon and other digital powerhouses are giant asteroids that can instantly turn businesses into soon-to-be-extinct dinosaurs makes good headlines, consider the following chart, which shows what happened to Match Group (MTCH) when Facebook announced it was launching a competing dating app (left), and to Walgreens-Boots Alliance (WBA) after Amazon announced it was getting into the pharmacy business:

Match Group (MTCH), 4/18/18–5/25/18 and Walgreens-Boots (WBA), 6/18/18–8/28/18. Match Group (MTCH) price chart, Walgreens-Boots (WBA) price chart. Not so fast.

Source: Power E*TRADE


Both of the down moves were huge (-22% for MTCH on May 1, 2018 and -10% for WBA June 28, 2018)—and so were the rallies that followed them. After closing lower the next day (May 2), MTCH ran 21% higher over the next 17 trading days; as of yesterday, it was up around 68% from the May 2 low.

WBA began to rally the day after its big sell-off, and a month later (on July 30, 2018) the stock was up 14%; it kept rallying until early December, when it topped out at $86.31—45% above its July 28 low.

SPOT’s case, so far, differs from these examples in that the stock didn’t drop nearly as much—a sign traders and investors were less concerned about the AMZN competition? Also, Amazon has yet to announce anything, and has declined to comment on the report that it could launch a free, ad-based music service as soon as this week.1 Yesterday, after making a lower low in early trading, SPOT pushed into positive territory.

In all these examples, though, the lesson seems to be to not necessarily take the immediate response to the Amazon (or Facebook, or Netflix) effect at face value. It’s an emotional reaction to a market development that calls for cool, detached analysis.

Market Mover Update:  Precious metals sagged yesterday, with June gold futures (GCM9) breaking below longstanding support around $1,285/ounce and falling to $1,275.50, their lowest level of the year.

Today’s numbers (all times ET): International Trade (8:30 a.m.), Wholesale Trade (10 a.m.), EIA Petroleum Status Report (10:30 a.m.), Beige Book (2 p.m.).

Today’s earnings include: Abbott Labs (ABT), BNY Mellon (BK), Morgan Stanley (MS), PepsiCo (PEP), U.S. Bancorp (USB), Alcoa (AA), Atlassian (TEAM), Kinder Morgan (KMI), Sallie Mae (SLM), United Rentals (URI).

 

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1 Barron’s. Spotify Stock Falls On News That Amazon Might Have Bigger Plans for Music. 4/15/19.

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