STOCK PICK: Revolutionizing Music, Podcasts & Live Audio
This company uses AI, modern technology, and personalization to enhance music, podcasts and live audio for all.
In an ever-evolving digital media landscape, this company has carved out a prominent position as one of the leading music streaming services. Since the company's unconventional direct listing in 2018, it has grown and innovated, expanding beyond music to podcasts and live audio.
Few names have generated as much buzz as our next stock pick - Spotify Technology (NYSE: SPOT). As the world's leading music streaming service with a growing foothold in the burgeoning podcast industry, Spotify has disrupted traditional media consumption methods and redefined the audio landscape.
Company Overview
Spotify is a digital music, podcast, and video streaming service that provides access to millions of songs and other content from artists worldwide. A user can browse a vast collection of music, create playlists, share tracks with friends, and listen to music on demand.
It uses proprietary technology to predict what songs you're likely to play next and downloads parts of those songs in advance to ensure seamless playback. This prediction is based on your listening habits as well as those of other users with similar tastes.
You can access Spotify through a web browser or download the Spotify app on your desktop or mobile device. The platform also supports other devices like smart TVs, game consoles, and car infotainment systems.
In a nutshell, Spotify is a comprehensive platform for streaming music and other audio content, designed with user-friendly features and using advanced technology to offer an enjoyable and personalized listening experience.
Spotify's Founding Story
Daniel Ek, a tech specialist and former CTO of browser gaming company Stardoll, and Martin Lorentzon, co-founder of Tradedoubler, an online advertising company, initially started the company as a small start-up in 2006 in Stockholm, Sweden. Both were driven by the vision to provide a legally compliant, user-friendly platform that could help combat growing music piracy while monetizing online music.1
The idea was to create a platform where users could listen to any music they wanted, directly from the cloud, without having to download files. It took two years for Spotify to develop its platform and secure necessary agreements from various record labels to host their music.
Spotify was officially launched to the public on October 7, 2008. The platform proliferated in popularity due to its ease of use and vast music library. The service's integration with Facebook in 2011 boosted its user base substantially. Users could share what they were listening to with their Facebook friends, which helped Spotify to spread virally.
Spotify has become one of the world's leading audio streaming platforms, offering access to a extensive library of music, podcasts, and other audio content.
How Spotify Makes Money
Spotify primarily makes money through two streams: subscriptions and advertising.
Subscriptions: Spotify operates on a 'freemium' model. This means that while it offers a basic version of its platform for free, it also offers a more feature-rich version (Spotify Premium) for a monthly fee. Spotify Premium subscribers enjoy benefits such as ad-free listening, the ability to download music for offline listening, and higher-quality audio.
Advertising: For those users who choose not to pay for Spotify Premium, their usage is supported by advertising. Advertisements are played between songs during listening and can also be visual ads displayed within the app. Companies pay Spotify to place these advertisements.
In recent years, Spotify has also expanded its focus to include podcasts and has been investing heavily in exclusive podcast content. This opens up additional avenues for revenue, both through increased premium subscriptions (if users sign up to hear exclusive content) and through potential advertising revenue related to podcast content.
Why Invest In Spotify?
When it comes to finding stocks with high potential, Spotify checks most of the boxes, indicating a profitable future. They include a basket of industry moats that keep the competition on its toes, major growth potential, solid financials and revenue growth, visionary founders, and exclusive artists to its platform, such as Joe Rogan and the Obamas.
Industry Moats
Companies that have multiple industry "moats" make it harder for the competition to gain market share, allowing the company to thrive and grow. Among Spotify's many industry "moats" include brand recognition, data collection, discovery features, investments in podcast platforms/tech, global presence, and a plethora of integrations.
Brand Recognition: Spotify has strong brand recognition as one of the first movers in the music streaming industry. Its name is often synonymous with music streaming, which can make it the go-to service for new customers entering the market.
User Base and Data: Spotify has a large and active user base, including free and premium users. This massive scale gives Spotify access to a wealth of data about listening habits, which it can use to improve personalization and recommendation algorithms. This personalization enhances the user experience and makes the service more sticky.
Playlist Curation and Discovery: Spotify is known for its robust playlist curation and music discovery algorithms, with features like "Discover Weekly" and "Daily Mix" that suggest songs based on a user's listening history. This has become a defining feature of Spotify and something that distinguishes it from many competitors.
Podcast Investments: Spotify has invested heavily in podcasts, acquiring companies like Gimlet Media, Anchor, and Parcast, as well as signing exclusive deals with popular creators. This gives Spotify a strong position in the fast-growing podcast market.
Global Presence: Spotify has a broader international reach than many competitors. Currently, it is available in more than 180 markets worldwide, which gives it a more diverse and expansive user base.
Platform Integrations: Spotify has focused on being platform-agnostic. It offers a more consistent experience across devices and platforms (iOS, Android, desktop, smart speakers, etc.) compared to some competitors, making it a versatile choice for users.
Huge Growth Potential
Spotify's growth potential is primarily driven by several key factors, including expansion, podcasts, technology and personalization, partnerships and integrations, and live audio.
Geographic Expansion: As of this writing, Spotify is available in over 180 markets, but there are still many markets where it has not fully penetrated. Expanding to new regions offers a significant opportunity for user growth.2
Podcasts and Other Non-Music Content: Spotify's strategic shift towards becoming an all-inclusive audio platform has opened new avenues for growth. The company's investments in exclusive podcast content, including deals with high-profile creators such as Joe Rogan, position it well in a rapidly growing podcast industry.
Technology and Personalization: Spotify's emphasis on leveraging data to deliver personalized and curated playlists helps it stand out in a competitive market. If Spotify continues to innovate and improve the user experience, it can drive user engagement and increase the likelihood of free users converting to paid subscriptions.
Partnerships and Integrations: Collaborating with other companies for hardware integration (like car manufacturers or smart speaker companies) can help Spotify reach more users. Furthermore, partnerships leading to bundled services, such as offering Spotify Premium with certain mobile contracts or other subscription services, could also contribute to growth.
Live Audio: Given the rising popularity of live audio platforms like Clubhouse, there's potential for Spotify to enter this space, leveraging its existing user base and robust creator relationships.
Solid Financials
All these reasons to invest in Spotify are great, but if the financial strength isn't there, it's a dying horse from the get-go. However, Spotify has shown some telling numbers. Here they are:3 4
Cash & debt: $3.44B in cash and $1.76B in debt. Little debt relative to the amount of cash they have on hand indicates they can weather any storm and continue to innovate and grow.
Growth rates: Revenue growth and levered free cash flow growth are trending up in double digits, indicating growing sales and free cash after all expenses - both proving a bright future.
Revenue Growth (YoY): 18.92%
Levered Free Cash Flow Growth (YoY): 32.50%
Inside ownership: 27.63% - With almost a third of the company owned by employees, this amount of skin in the game aligns their goals with investors, and that means that their money is just as much at stake as the investor’s money.
For more recent Spotify financials, take a look at the following:
Visionary Founders
Daniel Ek, the CEO and one of the co-founders of Spotify, has been a pivotal figure in the company's growth since its inception in 2006. Before Spotify, Ek had already made a mark in the tech industry by founding Advertigo, an online advertising company, which he later sold to his future Spotify co-founder, Martin Lorentzon. His technological acumen and entrepreneurial spirit played critical roles in conceptualizing and actualizing Spotify, shaping it into a service that revolutionized how we consume music.
One of Ek's primary strengths lies in his ability to foresee market trends and pivot accordingly. For instance, recognizing the growing influence of podcasts, Ek led Spotify's expansion into the podcasting domain, helping diversify the company's offering and increase user engagement. His vision for Spotify goes beyond just being a music streaming service; he aspires to make it the world's leading audio platform.
He has also been instrumental in navigating Spotify through several challenging phases, such as negotiating with record labels and leading the company through a non-traditional direct listing on the NYSE. His leadership style, vision, technical expertise, and profound understanding of the music industry make him an excellent fit as the CEO of Spotify, driving the company's continual growth in the dynamic and competitive world of digital music and audio content.
Exclusive Content
Spotify has partnered with high-profile figures in the music and podcasting world, attracting millions of listeners and fanatics of these exclusive artists' content. For instance, they've signed exclusive podcasting deals with figures like Joe Rogan and the Obamas, who have large followings and significant influence. These partnerships help to drive listeners to Spotify's platform.
Competitors to Spotify
The top three competitors to Spotify in the music streaming market are:
Apple Music: Apple Music is a significant competitor due to its integration with Apple's vast ecosystem of devices. Since Apple devices come pre-loaded with Apple Music, this gives the service a large potential user base. It also offers a comparable music library and similar subscription pricing to Spotify but does not provide a free tier.
Amazon Music: Amazon Music benefits from being bundled with Amazon Prime, a service with millions of subscribers worldwide. This offers a significant user base for Amazon Music. Like Spotify, it provides a large catalog of songs and podcasts.
YouTube Music: YouTube, owned by Google, is a significant player due to the popularity of YouTube for music videos and the vast amount of user-generated content. YouTube Music, its music streaming service, benefits from integration with the broader YouTube platform and offers a mix of official tracks, music videos, and user-generated content.
These platforms are significant competitors to Spotify due to their extensive music libraries, large potential user bases, unique selling points, and substantial resources. They all offer competitive subscription pricing and various features designed to enhance the user experience, such as curated playlists and personalized recommendations. However, each has a slightly different approach and focus, allowing them to appeal to different market segments.
Potential Risks of Investing In Spotify
Investing doesn't come without risks, and Spotify is no exception. Potential risks specific to Spotify include:
Competition and Market Saturation: Intense competition in the music streaming industry could lead to slower user growth or an increased churn rate. Market saturation, particularly in developed markets, is also a concern.
Profitability: Spotify's business model involves significant costs for music licensing fees, which can limit its profitability despite revenue growth. Competitors with other considerable revenue streams (like Apple, Amazon, and Google) may be better able to absorb these costs.
Dependence on Major Record Labels: Much of Spotify's content is controlled by a few major record labels. Changes in these relationships or licensing agreements could significantly impact Spotify's business.
Platform Owners: Apple and Google, which own the two dominant mobile operating systems and app stores, have significant control over the distribution of Spotify's app. This could lead to potential conflicts, as seen in Spotify's complaints about Apple's App Store practices.
The Bottom Line
When all is said and done, I like Spotify because of its industry-leading personalization to its users, its discoverability features, and its exclusivity to prominent personalities like Joe Rogan. Furthermore, its growth, as shown in its financials, indicate a profitable future with a continually growing user base and revenue. Although not yet a profitable company, it's a milestone that Spotify will pass soon.
Furthermore, Spotify has yet to tap into many other markets throughout the globe and is using top AI technology to accelerate its growth and product user experience. Both of these signal that Spotify has a lot of room to grow, which means a potential multi-bagger stock for investors.