June 16, 2024

Spotify stock pick: Buy/hold/sell?

Spotify is a music, podcast, and video streaming service developed by Spotify AB in Stockholm, Sweden. Spotify allows you to create and listen to playlists for free or subscribe to Premium for on-demand access with zero ads. 

The revenue model is simple: Premium subscribers and Ad-supported revenue. As of December 31, 2021, its platform included 406 million monthly active users and 180 million premium subscribers in 184 countries and territories. 

Spotify has transformed the way people access and enjoy music. Today, millions of people across the world have access to more than 82 million tracks, whenever and wherever they want. They are a prime driver in transforming the music industry from a "transaction-based" experience of buying and owning audio content to an "access-based" model allowing users to stream on demand.

Technical Analysis

Support: The two most relevant levels are around $125 and $175. These levels will need to be recaptured in the short-medium term before it can consider returning to former glory.

RSI: The RSI has been trending below 30 since the start of the year, which indicates severely oversold levels. This should signal an eventual reversal in the trend.  

Well, theres no easy way to put this: this is one ugly looking chart. In the last 12 months, the company has gone from the highest of highs to the lowest of lows (quite literally). Since its inception on the Nasdaq, this is the lowest price at which the company has ever traded. Is Spotify going under, or is the company due for a change in of winds? I believe the latter is most probable.

Financials (Latest financials 31 March 2022)

Total monthly active users grew 19% Y/Y to 422 million
Premium subscribers grew 15% Y/Y to 182 million

Revenue, Gross Profit
Revenue: Roughly 90% of Spotifys revenue is generated via its premium subscriptions. Revenue of 2,661 million grew 24% Y/Y. Split: Premium Revenue grew 23% Y/Y to 2,379 million while Ad-Supported Revenue grew 31% Y/Y to 282 million. 
Gross Margin finished at 25.2% in Q1. Gross Margin was positively influenced by a favourable shift towards podcasts and growing marketplace activity but was offset by increased non-music content spend, investments in music product enhancements, and modestly higher Other Cost of Revenue. 25% gross margin is below par in my opinion. Spotify should aim to increase either revenue or decrease the cost of revenue to get to 35%-40% which I believe is more realistic for long-term growth. 

Operating expenses
Spotify is still classified as a growth company, meaning that we dont necessarily expect profits. Since its inception, operating expenses have wiped out all the gross profits generated by the company. Operating expenses include research and development, sales and marketing, and general and administrative expenses. (See attached image). The problem Spotify faces at the moment is that operating expenses keeps increasing at the same pace as revenue. The company has to find a way to streamline expenses to decrease the operating expense ratio. 

Cash reserves
Spotifys has strong cash reserves. This opens the door to exploring new revenue-generating avenues and investments.  

Why Spotify?

- Industry: Music/podcasts will always remain an integral part of society. Spotify and Apple have dominated the market and will most likely continue to do so. 

- Revenue continues to grow and will most likely continue to grow via a subscription-based model. Many people made the switch from Apple to Spotify, even among iPhone users, due to the quality of the product that Spotify produces.

- Premium conversion: Spotify's model depends on people signing up for its service, whether that's through a free trial or the free-to-use ad-supported service. A decent proportion of these users then ultimately become premium or paying users, boosting revenue and margins in the process. 

- Advertising: More users improve Spotify's bargaining power with major record labels and advertising agencies. Advertising revenue only makes up 10% of the total revenue currently, and the gross profit made from advertisement is also only 10%, which suggests there is room for growth in this regard. 

- Not only a music platform: Growth in the number of users that engaged with podcast content continued to outstrip total monthly active users growth, podcast consumption rates grew in the double digits Y/Y, and podcast share of overall consumption hours on our platform reached another all-time high.

- Product enhancement: Collaborated with IKEA on the integration of Spotify on their newest Bluetooth Speaker lamp, Vappeby, which is now the first Bluetooth speaker on the market that comes with Spotify Tap. Additionally, new or existing Porsche vehicles with the Porsche will now be able to stream Spotify as an audio source. 

- Partnerships: On March 15th, the company announced a long-term partnership with FC Barcelona whereby Spotify will become the Main Partner of the Club and its Official Audio Streaming Partner. 

- Technical analysis: Share price is the lowest its ever been. This, of course, does not mean its undervalued. But chances are that we will recover from here.

All in all, Id put Spotify in the wait-and-see category. They have a brilliant product, but if they cant increase profit margins and decrease operating expenses, the company will keep failing to generate a profit. The share price has tanked significantly though, so taking a small position might not be the worst idea.

***Disclaimer: This is not financial advice. Always do your own due diligence. All content is for informational purposes only***



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