Spotify Technology (SPOT), the new IPO, is a streaming song site that pays musicians as well as shareholders out of a combination of subscription and advertising revenue, notes Todd Shaver, growth stock expert and editor of BullMarket.com.
Spotify launched in 2008 amid dramatic disruptions in the music industry as physical media gave way to digital distribution and rampant piracy. The company has succeeded in attracting 70 million paid subscribers and after its recent listing on the NYSE is valued at $27 billion.
Global recorded music industry revenue declined by 40% from $24 billion in 1999 to $14 billion in 2014 following the launch of the first internet-based music download service.
Consumption, however, has become more ubiquitous than ever as younger "digital natives" play their favorite songs on demand on a wide variety of listening devices. Spotify’s paid access model helped re-monetize the music business starting in 2015 when global recorded music revenue grew more than 3% from the prior year.
Industry growth accelerated in 2016, when revenue reached $16 billion, an increase of 6% from 2015. This was the highest annual growth rate in 20 years, although admittedly the base has dropped. Legal listening channels like Spotify have a lot of ground left to recapture before demand for music reaches 1999 levels.
By transforming user behavior, streaming has become the dominant global format in the Music industry, fueling growth in key music markets worldwide.
Asia is an obvious opportunity, since many young and economically dynamic consumers in China and similar countries have moved straight from live performance listening contexts to streaming songs on smart phones, bypassing physical media entirely. Services like Spotify are the only music marketplace they have ever known.
Spotify’s Premium Service provides subscribers with unlimited online and offline high-quality streaming access to the company’s catalog of music. The Premium Service offers a commercial-free music experience.
Its Ad-supported Service has no subscription fees and provides users with unlimited on-demand online access to the company’s catalog, but only after listening to ads. Between the two models, the company is the largest global streaming music subscription service.
With a presence in 60 countries and growing, Spotify’s platform includes 160 million monthly active users and 70 million Premium Subscribers, which is nearly double the scale of the closest competitor, Apple Music.
Spotify’s users are highly engaged. Spotify currently monetizes service through both subscriptions and advertising. Premium Subscribers have grown 45% year-over-year, and counting advertising-supported free users the overall audience is growing at a rate of 30% annually.
The Ad-supported Service serves as a funnel, driving more than 60% of total gross added Premium Subscribers since 2014. These growth figures tell the story: People just love this product.
Spotify generated revenue of $2.2 billion in 2015, $3.5 billion in 2016, and $4.9 billion last year, representing a compound annual growth rate of 45%. While earnings are expected to be a negative $1.65 this year, the burn rate is slowing fast.
We're looking for a loss of just $0.65 in 2019 as revenue scales toward sustainable profitability. We like the fact that the company has $1.9 billion in cash and just $800 million in long term debt in a convertible note, which will more than likely be converted to equity as the company grows.
Spotify has been able to post solid revenue growth after pivoting to a household account model like Netflix, where paying users pay more to support multiple streams across a residence or family unit.
As Spotify continues to grow it also should generate significant leverage with musicians and other rights owners, giving it the power to influence audience demand on behalf of the industry as a whole, as well as enhancing its own financial success.
Early reception to Spotify as a public company has been positive. The bullish story here revolves around the large market opportunity as music continues to move towards streaming at a rapid pace. This is an early-stage play focused on capturing growth and market share. (Meaning: It is a speculative investment.)
Being able to leverage this growth down the road to drive profitability is the key to big share price appreciation. While the company has a solid position now in terms of subscriber and user numbers, recent performance proves it can maintain the lead in the face of competition. We believe they will succeed. Our target price is $175 per share.
