Spotify (SPOT) Heads Upstream On An Analyst Upgrade Today; Long-Term Outlook Is Solid
2:19 pm Wednesday, June 15th, 2022
Spotify (SPOT) is heading upstream on a Wells Fargo upgrade to “Equal Weight” from “Underweight” today. We think that as consumers look to cut back their more discretionary expenditures in the wake of rampant inflation, the music and audio streaming service is worth a look, as its subscriber base has been relatively resilient to the current macroeconomic challenges.
SPOT’s dual-revenue approach, offering ad-supported freemium user-paid premium subscriptions, contributes to the company’s growing and sustainable user base. Total monthly active users (MAUs) as of Q1 may have slowed yr/yr from previous quarters, but SPOT still grew the metric by 19% to 422 mln, including a 15% jump in premium subscribers and 21% in freemium users.
Furthermore, since users can begin using Spotify for free, this approach has also allowed the company to expand extensively from 65 global markets to 183, including all of Africa, in the four years since its IPO.
Also, in the event of a recession, SPOT is cushioned from a pronounced loss in its total MAUs, as premium subscribers can shift to the ad-supported option. In Q1, ad-supported revs made up around 13% of overall revenue.
This stickiness shows up to a degree in SPOT’s monthly churn rates, which have fallen nearly 30% over the past four years.
The company outlined bold long-term targets at its Investor Day on June 8. Management is targeting $100 bln in revenue with gross margins of 40% within the next decade.
Currently, SPOT has to pay royalties to record labels, such as Sony (SONY). However, over time, artists may find it more lucrative to publish directly with Spotify, reducing record label payments and helping grow margins.
SPOT is also going deeper into the audiobook market, acquiring AI-based text-to-speech platform Sonantic, which could allow SPOT to build an impressive library of audiobooks using AI recordings. SPOT estimates the audiobook market to possess a $70 bln annual opportunity.
Bottom line, SPOT is amid many tailwinds that could speed up its path toward reaching its ambitious long-term targets. However, with tech giants already in the audio streaming space, SPOT’s path toward its long-term goals could be met with meaningful resistance from these major players.
