Dispelling Fears of Competition
Bears are concerned about Spotify’s ability to capture market share in music streaming, with the biggest competitor being Apple Music.
From online reviews, audiophiles say that Apple Music has slightly higher music quality than Spotify, and that has what has resulted in some to jump ship. For the average retail consumer, their ears are not going to be attuned to identify such minutiae differences in quality, especially for Podcasts where there will be no material difference in levels of enjoyment. While further investments in audio tech and introducing Lossless audio might help Spotify to reduce the biggest reason for churn, I doubt that this impact will be material and for now, Spotify is better off investing in expanding their product offerings, especially in the podcast space where other platforms seem to be neglecting.
According to Podtrac, Spotify was the most preferred podcast application with a third of US podcast listeners, which is a 21% increase in audience share for the platform since September 2021. Apple Podcasts followed closely behind as the second most preferred platform with a quarter of all US podcast listeners. There were no other major competitors to Apple and Spotify, with the next nearest application on the list, iHeartRadio, only amassing 6.2% of the audience share.
Another reason why I think we can be reassured of Spotify’s position in the market is because their biggest competitor, Apple Music, caters mostly to Apple users.
Globally, Apple OS only takes up 28% share, while Android dominates with >70%. Looking at Google Play Store downloads, Spotify has seen >1 billion downloads while Apple Music only at 100m. This would mean that Spotify has 10x the popularity of Apple Music on non-Apple devices.
It would seem like non-Apple users generally tend to not participate in the entire ecosystem, and their walled garden could be a double-edged sword that might drag them in terms of capturing share in their non-iPhone products and services. With that, Spotify would undoubtedly be the most well-positioned player to capture the rest of the market.
Breakeven Analysis
From 2022 to 2025, I assumed premium users comprised ~38% of MAUs, ~4% higher premium ARPUs, gross margin expansion by 320bps, and 7% CAGR in operating expenses. Dividing 2025 fixed costs by contribution per MAU, I derived a breakeven MAU of ~622m. This would imply a 3Y CAGR of 8% from 489m in 2022, much lower than the 3Y historical CAGR of 22%, and last quarter’s growth of 27%. There is a high likelihood that Spotify will comfortably achieve this and turn profitable at the operating level.
Valuation
Spotify currently trades at 1.5x NTM sales and is looking extremely cheap. Music as an industry is extremely resilient that should do well regardless of macro environment; relative to other tech sectors the sentiment here should not deteriorate as much and would allow for higher potential to outperform. I believe the max downswing from here would be at most ~30%, this is likely to be driven by temporary depression in sentiment due to recession fears, MAU growth slowdowns etc, but I would recommend accumulating even more at those levels.
This is a long-term bet that I see very little likelihood of not materializing, but would still require ongoing monitoring, especially in margins and MAU growth. I value Spotify at 3x target EV/Sales, in line with historical average. This would imply a 3Y target upside of 120%, and 5Y target of 168%.
Sources:
1 Spotify Q2 2023 Earnings Call & Presentation
2 Spotify 2022 Annual Report
3 https://newsroom.spotify.com/2023-07-24/adjusting-our-spotify-premium-prices/
4 https://fred.stlouisfed.org/series/A229RC0A052NBEA
5 https://fred.stlouisfed.org/series/UNRATE
6 Spotify Q1 2020 Earnings Call & Presentation
7 https://www.whippedcreamsounds.com/how-much-does-spotify-pay-per-stream/
8 https://artists.spotify.com/en/blog/now-in-beta-upload-your-music-in-spotify-for-artists
9 https://artists.spotify.com/en/blog/masterclass-making-money-on-spotify-loud-and-clear-merch-fan-support
10 https://www.printful.com/blog/how-to-sell-merch-on-spotify-with-shopify#:~:text=Link%20Shopify%20and%20Spotify,-Now%20you%20have&text=Go%20to%20your%20Spotify%20artists,you%20can%20enter%20your%20details.
11 https://producerhive.com/music-marketing-tips/streaming-royalties-breakdown/
12 https://www-statista-com.libproxy.smu.edu.sg/study/72655/digital-music-deezer-users-in-the-united-states/
13 https://www.cnbc.com/2023/01/23/spotify-to-cut-6percent-of-its-workforce-as-tech-layoffs-continue.html
14 https://www.cnbc.com/2023/06/05/spotify-layoffs-200-employees-or-about-2percent-of-its-workforce-cut.html
15 https://newsroom.spotify.com/2022-06-08/spotify-founder-and-ceo-daniel-eks-investor-day-2022-remarks/
*Do note that all of this is for information only and should not be taken as investment advice. If you should choose to invest in any of the stocks, you do so at your own risk.
精彩评论