Spotify: the future looks very bright (NYSE: SPOT)
When we think of technology and apps that have changed our lives across various categories in the music space, naming Spotify (NYSE: SPOT) as a generational driver is ubiquitous. This world leader in music streaming has almost synonymous with the music industry itself, and although Wall Street and the markets have had a love-hate relationship with Spotify ever since its direct listing at nearly $150 per share, the company continues to crank out excellent results.
This is exactly why, when the broader markets are falling and tech/growth stocks continue to be punished (even companies with strong fundamental performance), companies like Spotify should be bought aggressively. I recently looked into my position on Spotify and will continue to be an avid buyer of the stock as it falls.
Needless to say I stay bullish on Spotify. The company is performing well on a number of key metrics – including strong Premium subscription additions, while growing ad-supported revenue streams. Yes, profitability is currently down due to growing operating expenses, but that’s no different than what dozens of other companies are reporting.
I also think that some recent initiatives launched by Spotify are particularly exciting. The company, which is already no stranger to revenue and product diversification, could enter the live event ticket sales space through its new Spotify Tickets site, occupying a space currently dominated by beleaguered vendors. like Eventbrite (EB). The biggest challenge companies like Eventbrite faced was scale. Especially during the pandemic, it has relied heavily on small “indie” creators rather than mainstream events to boost its business.
Spotify, on the other hand, already has direct relationships with global stage idols. This kind of “vertical integration” in managing an artist’s entire distribution, from virtual music streaming to physical concerts, can represent a massive expansion of Spotify’s mandate and its eventual TAM.
Here’s a reminder of all my other reasons to be bullish on Spotify:
- Spotify continues to roll out new products and prove that it has something for everyone. In 2021, Spotify rolled out a new paid tier called “Spotify Plus”, its cheapest plan at just $0.99/month. While this tier is still ad-supported, it gives users the ability to skip as many songs as they want in an hour, potentially opening up Spotify to more low-end consumers. Along with consumer innovations, Spotify has also improved the partner experience, with innovations such as the Spotify Audience Network for podcast advertisers, giving them the ability to target podcast listeners more effectively and hopefully… help increase podcast monetization (Spotify’s biggest growth category).
- Successful price increases for Premium. Spotify has increased the price of its Family plan in the US, Family/Duo/Student plans in the UK and all plans in Brazil. The fact that Spotify has reported no significant change in churn since the price changes took effect speaks to its relative inelasticity when it comes to music streaming. Additionally, Spotify has proven to be a very sticky platform, with content like podcasts and playlists keeping subscribers hooked on the platform.
- Two-sided market. Another nascent revenue opportunity for Spotify: Paid marketplace tools for content creators represent another way to fully integrate Spotify into the music ecosystem and expand its share of wallet.
- Margin building and rich free cash flow profile. Higher ad rates, a shift to podcasting, and the general economies of scale from paying for music content spread across a larger user base helped Spotify significantly increase its gross margin and free cash flow profile. .
- Work from anywhere. Spotify has announced a remote working option for all of its employees globally, which I see as a positive step that can reduce Spotify’s real estate footprint and lower long-term operating costs.
Do not close your eyes to the rich opportunities that this title offers. The decline is entirely based on sentiment; there’s nothing in Spotify’s recent quarterly results that deserves the steep roughly 60% drop the stock has suffered year-to-date. Use the dip here as a buying opportunity.
Now let’s take a closer look at Spotify’s latest quarterly results. The second quarter revenue summary is shown below:
Spotify’s second-quarter revenue increased 23% year-on-year to €2.86 billion, beating the company’s forecast of €2.80 billion (+20% year-on-year) annual) with a margin of three points. Revenue also kept pace with the first quarter’s 24% year-over-year growth rate.
The force was quite broad across all revenue streams. On the Premium side, which still accounts for the lion’s share of Spotify’s revenue, the company saw a 14% year-over-year increase in subscribers (again matching the 15% year-over-year growth rate of the first trimester). The company also added 6 million net new subscribers in the second quarter, which was particularly noteworthy after a relatively weak first quarter addition of just 2 million subscribers.
The company noted that a slightly longer promotional window (5 weeks vs. 4 last year) contributed to the success. On a geographic basis, the company highlighted that Europe was benefiting from strong reactivations of inactive subscriptions, while Latin America saw a surge in the number of Gen Z users alongside new music releases. We also note that ARPU continued to grow, driving 22% YoY growth in Premium revenue versus 14% YoY growth in subscribers, with ARPU growth driven by increases company’s successful awards across all of its plans.
Advertising revenue was another major strength. The company saw 31% year-over-year growth in ad revenue in the quarter, driven by improved podcast monetization, and ad revenue reached a record 13% contribution to overall revenue.
The only potential weak point was the opex, but Spotify suffers from the same cost/wage inflation as every other company. The graph below shows how each component of opex has increased year over year. FX was a major headwind here despite Spotify’s European domiciliation, as a stronger dollar stretched Spotify’s largely dollar-based Euro spending:
Spotify management, however, cites confidence in the future and the absence of material impacts from macro cloud darkening in its business. However, the company is taking cautious steps to slow hiring to prepare for a downside event. According to remarks prepared by CEO Daniel Ek on the second quarter earnings call:
Going forward, while the macroeconomic environment continues to present uncertainties, we currently see no material impact on our expectations for user or subscriber growth as a result of the economic downturn. In fact, we see several markets ahead of our forecast. That said, in anticipation of a potential downturn, we’ve previously shared that we’ve proactively reduced our hiring by 25% and implemented weekly revenue double checks. I’ve said it before, I believe only the paranoid survive, and we prepare as if things could get worse, but it’s hard to be anything but optimistic given what I’m seeing right now.
Longer term, recession or not, my faith in our company and the unique Spotify machine we’re building is truly unshakeable. Audio is growing and Spotify with it. Hopefully after last month’s Investor Day, it’s a term you’re all familiar with. And for those who need a refresher, we think the Spotify machine is what sets us apart from other technology platforms. It is built on a unique customer experience, powered by three revenue-generating business models: subscriptions, ads and marketplace. And as I detailed last month, we are confident in our ambitions to reach 1 billion users by 2030, while also focusing on improving our gross margins and continuing to generate positive free cash flow.
Key points to remember
With strong execution in its core business (growing subscribers despite price increases, doubling advertising as a secondary revenue stream) with potential new growth drivers like upcoming concert ticket sales, it is There’s no reason not to stay bullish on Spotify. Use the decline as a buying opportunity.