Tue. Jun 15th, 2021


In a year unlike any other in modern history, very few industries have escaped the adverse effects of the coronavirus pandemic. Between the loss of lives and livelihoods, to say global economies have been rattled would be an understatement. With concerts, festivals and other public events increasingly feeling like folklore from a simpler time, the traditional entertainment industry has arguably been among the hardest hit in 2020.

Music streaming, however, has been a winner. The pandemic has seen a larger absolute increase in the number of users flocking to music streaming services than any year before. This continued embrace of streaming services will outlast the pandemic as the global demographic dividend finds more of the free-tiered youth shifting to paid subscription plans for their favourite services.

A Force To Be Reckoned With

There is one company that is not only synonymous with music streaming but has also exhibited major growth over a year that has been nothing if not challenging to navigate – Spotify Technology SA (NYSE:SPOT). Having recently announced a 29% year-on-year growth in active usership, bringing that total to 320 million monthly users, there is no denying that the Swedish-based media company is a force to be reckoned with.1

However, Spotify Technology SA is by no means the sole market player offering a seemingly unlimited collection of music on-demand, so what differentiates it from the likes of Apple Music and Amazon Prime – both of which have active user counts that are dwarfed by that of Spotify? It is especially impressive to consider the success Spotify has demonstrated when one remembers that these competitors are backed by older, more established tech giants with greater access to resources and distribution networks.

As a former Apple Music subscriber, I can speak for many loyal Spotify users when I say that the experience you get with the latter is simply better. Spotify has mastered its artificial intelligence algorithm that recommends new music to its listeners – this alone puts the platform on a different playing field from the rest. For anyone who is interested in music discovery, there is simply no other option. And while some technology can be copied, there is reason to believe that playing catch-up when it comes to the algorithms that inform music recommendations is no easy task.

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Recent Acquisitions

For more evidence that Spotify Technology SA is only at the beginning of its success story, one must only look to the company’s recent acquisitions. Over the last year or so, Spotify has acquired multiple major podcasting businesses, signaling that it intends to be the go-to for all kinds of audio, not just music. While Apple maintains a larger library of podcasts, volumes may not be enough in this game. Again, Spotify boasts the ability to recommend content based on listeners’ tastes that other market players have failed to master. Spotify has also recently introduced an innovative new advertising model that could just bring it leaps and bounds further ahead.

Streaming ad insertion (SAI) allows for highly targeted advertising within podcasts (advertising is the primary revenue stream relied upon by podcasters), which will leverage the enormous amount of data Spotify has on its user, resulting in a much more relevant user experience than the traditional mode of podcast advertising, where the host simply reads a message from the episode’s sponsor. This new model will see happier advertisers, who can now get more meaningful data on the reach of their content – insight into who clicked through, who backed out at point of purchase and how their potential customers may be better targeted. This will undoubtedly attract more ad dollars for Spotify than ever before and will see stronger implementation from as early as 2021.

Finally, one value that Spotify Technology SA has that its competitors do not is focus. The global audio streaming market is theirs to lose, and the rate of the company’s investment into continued improvements for user experience signals that they don’t take their lead for granted. In 2019, Spotify spent $722 million on research and development – we have only just begun seeing the fruits of that labour. With no hardware or video to distract from their core mission, Spotify is poised to remain the market leader of audio streaming. And with more people than ever before looking for a way to escape the noise of the outside world, even a second wave of COVID-19 is unlikely to throw Spotify off track.

Spotify Has Outperformed The Large Majority Of Stocks

Experts agree that Spotify’s stock, SPOT, is the leader in its industry and with an IDB Relative Strength Rating of 92, it has outperformed the large majority of stocks over the last 12 months. As of 30 November 2020, SPOT was valued just under $273 per share with a market valuation sitting at ~$52.6 billion.

In determining my own valuation, I first forecasted the number of active users at the end of Q3 2021. Looking at historic growth rates in the user base, the average over the last five years is roughly 30%. Applying a 30% growth rate to the Q3 2020 numbers enabled me to forecast a year forward – a total of 416 million total monthly users. To estimate how many of those would be paid customers, I again considered the historic split. In this case, paid users on average account for some 45% of the total user base, or in my model, 187 million users.

With the number of paid users forecasted, I applied the average revenue per Premium user to arrive at a total revenue from this segment. To do this, I took the average revenue earned in USD Q3 2020 and adjusted for 6% exchange rate fluctuations going forward in favour of Spotify Technology SA, giving them an average annual revenue per user of $64. This, however, only accounts for revenue from paid subscribers and not ad revenue. In 2021, the contribution to revenue from SAI will grow and, under my assumptions, account for 12% of revenue as opposed to the 9% seen in Q3 2020.

Stock Valuation

Using an income approach, I then applied a multiple on my calculated revenue of 3.7 (based on Finbox), giving me a valuation of ±$51 billion in the absence of any debt on Spotify Technology SA’s balance sheet. Given the value, I believe Spotify is a hold at this point and would purchase anywhere below the $270 mark.

With its outstanding rate of growth, continued product innovation and optimization and what appears to be a sustainable revenue model, I believe SPOT is a compelling opportunity. SPOT can provide market returns over the coming years and, for me, looking at parking my cash in low-risk, stable equity, I favor SPOT as an investment destination.

On their own podcast, “Spotify: For the Record,” CEO Daniel Ek stated, “I think we’re in the early days of audio as a category, we just need to recognize that.” If this is any indication as to what the company has in store for the coming years, we’re unlikely to see SPOT falling behind anytime soon.

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Disclosure: None.



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