Spotify stock (SPOT) has been down for over 6 months, after peaking in February 2021 at $364 per share. Today, the company’s shares sit below $230. However, most Wall Street experts still think that SPOT is still a good investment for the long term.
Not unlike the rest of the streaming industry, Spotify faces compelling growth prospects and has been investing heavily to remain the top digital music name in the market. Today, we discuss three key factors that support the bullish case on SPOT.
The audio streaming market
Music streaming grew around 15% YOY in 2020. The market should continue to expand at least 7% over the next 5 years (see below). This is mainly due to underpenetrated emerging markets, where improving tech infrastructure has enabled the gradual adoption of streaming services.
Despite robust growth expectations, the audio streaming market is still very concentrated in the hands of a few, at least compared to video streaming. Spotify is clearly the dominant player. Its market share is about as large as those of the second and third largest peers combined.
Spotify’s business model
The company's business model works as follows: first, royalties are paid to the owners of the content that is played on the platform. The music is distributed to premium and free users. Free users generate revenue through targeted ads, while subscribers pay a subscription fee for unlimited access to all content on the platform.
Spotify's free service is only a small part of the company's revenue. However, the freemium model relies on this seemingly unimportant group of non-paying users to attract new subscribers. Free access is a way for new customers to get to know the platform and, hopefully, purchase the premium subscription in the future.
The strategy seems to be working. The chart below suggests that Spotify’s service has a high conversion rate. While total monthly active users have been growing at a CAGR of 20% since 2015, the growth rate of subscribers is even larger: 33%.
Content is King
Spotify has one of the largest music libraries, but its key competitors have been keeping up. Apple Music (AAPL) and Amazon’s (AMZN) Prime Music, for instance, have the same 70 million songs available in their vast portfolio, making content size less of a differentiator.
However, Spotify stands out in other ways. Currently, the company has around 2.6 million podcast titles available on the platform. While podcasts are offered for free today, the model could evolve to ad- or subscription-based, offering Spotify another revenue stream opportunity.
In addition, Spotify has been investing in other fronts. For example, the company acquired Locker Room in March 2021, an audio platform for sports-related discussions. This could prove to be one of Spotify’s first moves into live audio experiences.
Based on fundamentals and growth prospects, we believe that Spotify stock could be a good investment. The company is the leader within a very promising sector. Despite heavy-hitting competition from the likes of Apple and Amazon, Sportify still manages to stand out.
Better yet, the stock is far from its all-time high. Should Wall Street analysts be right that EPS could reach $6 by 2025, the sub-40x forward earnings ratio is still rich, but perhaps justifiable for this exciting growth story.
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(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting MavenFlix)