Why Global Expansion is Key for Spotify’s Success

Spotify stock has been down 35% from the peak, but the pullback does not mean that fundamentals are weak. Here’s how emerging markets could be a key factor in the company’s growth.
Author:
Publish date:

Despite being surrounded by many able competitors, Spotify  (SPOT) - Get Spotify Technology SA Report remains dominant in the global audio streaming space. The company has been delivering positive subscriber net adds each quarter. But how can the company maintain the growth pace for years to come?

The secret probably lies in the company's underexplored markets. Emerging countries are the key to gaining even more subscribers, maybe even faster. MavenFlix discusses how below.

Figure 1: Spotify platform being played on tablets.

Figure 1: Spotify platform being played on tablets.

(Read more from MavenFlix: Spotify Stock: 3 Reasons To Buy Right Now)

Global expansion incoming

Currently present in 178 countries, Spotify already has a diverse number of customers. However, there are still several markets to be explored.

Consider the company's penetration in Latin America: 33 million subscribers out of a total population of 600 million, for a ratio of 7.5%. Applying this same ratio to other global regions like Africa, Asia and Oceania, it is not a stretch to assume that the company could produce 460 million new subscribers.

With an eye on the growth opportunity, Spotify has increasingly invested in new markets and protected those in which it is already dominant.

Figure 2: Spotify subscribers.

Figure 2: Spotify subscribers.

Emerging Markets should drive longer-term growth

It makes sense that Spotify’s growth efforts should focus on emerging countries – despite understanding that the ARPU (per-unit revenue) opportunity would not be as great as it is in developed nations. Between 2019 and 2027, these markets are expected to represent more than 70% of all global growth in the music streaming space.

Spotify has taken note. In the first quarter of 2020, Latin America and the rest of the world (Asia, Africa and Oceania) accounted for 73% of all new subscribers in the period, an increase of 130% compared to the same quarter last year.

Figure 3: Percentage of emerging market' Spotify users.

Figure 3: Percentage of emerging market' Spotify users.

However, conversion from free users to subscribers has been slower in these markets. People tend to test the product longer before buying the service, even at lower prices than in developed markets. But more aggressive user and subscriber CAGR (annualized growth) should help to make up for some of the soft conversion metrics.

Figure 4: Spotify monthly active users.

Figure 4: Spotify monthly active users.

Is competition a threat?

Even though audio streaming companies don’t usually differentiate much on product features (the top three players offer the same 70 million song titles, for example), Spotify still seems to have an advantage in the space.

The company has more subscribers than all its competitors and it is present in more countries than most. In addition, the company does not need to compete so much on price, which could be a weakness, but on other types of audio content that it makes available (podcasts, for example) and user experience.

Figure 5: Paying users.

Figure 5: Paying users.

MavenFlix’s take

For the reasons above, we remain bullish on Spotify stock and confident in the future of the company. Spotify has been aligned with industry trends and aims to expand its customer base in the face of the many opportunities presented by emerging markets.

If the assumptions are confirmed, SPOT share price could appreciate in the long term, especially off current levels that are 35% below all-time highs.

(Read more from the MavenFlix: Netflix Stock: Should You Buy It In September?)

Get more expert analysis on SPOT

It’s never too early (or late) to start growing your investment portfolio. Join the Real Money community for just $7.50/month and unlock expert advice from our team of 30+ investing pros.

(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)