Newly public companies have the benefit of their Wall Street bank underwriters doing all they can to make the stock market debut a success. Spotify went public with a so-called direct listing on Tuesday, cutting out Wall Street and its high fees, but missing some of that support system, as well.
On Wednesday, a day after Spotify’s shares began trading on the New York Stock Exchange, the price had dropped 6% to $140.02 at midday. Ultimately, the shares closed down just 2% at $145.87.
The initial sharp drop followed several analyst reports that gave the company’s stock lukewarm ratings. In a more typical underwritten deal, most banks would have to wait a couple of weeks before putting out analyst reports, but those reports would usually be pretty positive.
Not so for the world’s largest music streaming service. Gabelli & Co analyst John Tinker rated Spotify a “hold,” which is often viewed by investors as a negative assessment given how infrequently analysts issue “sell” ratings. Two other firms, Redburn and SEB Equities, also came out with equivalent ratings.
Get Data Sheet, Fortune’s technology newsletter.</em></p> <p>Spotify has grown quickly, but has yet to find a way to make a profit after paying out huge sums to record labels for the music its customers play. Revenue of $5 billion last year was up 39% from 2016. But on an operating basis, excluding some financial transaction costs, Spotify lost $465 million, 8% worse than the previous year. And it’s facing strong competition from services offered by Apple (AAPL) and Amazon (AMZN).
Spotify says it plans to leverage its customer base of 71 million paying subscribers and 157 million monthly active users at the end of 2017 by offering additional services beyond just music in the future. It also has a deal with the labels to pay lower royalties as its customer base grows. But analysts still aren’t sure the company should be worth much more than the $27 billion or so indicated by its current share price.
Spotify (SPOT) already has two revenue sources, collecting advertising sales from its free service and subscription revenue from its premium service. And it pitches services to musicians, offering them valuable data about the people who like their music. That creates a two-sided market with a lot of potential, Redburn analyst Nick Delfas noted. But it may not be enough to carry the company to big profits, he said in his report on Wednesday rating the shares “neutral.”
“We like Spotify’s two-sided business model potential, but it will take time to be proven,” Delfas wrote. “At the same time we see limited pricing power as free alternatives will persist, and that is in the here and now.”
The competition also concerns Delfas. “Apple is gaining share in the U.S., and Amazon is gaining share more widely using the Echo as a Trojan Horse,” he writes. “While Netflix competes against the traditional payTV ecosystem, Spotify’s competitors are from the new era, even if not as specialized as itself, and very powerful.”
(This story was updated on April 4 with Spotify’s closing stock price.)