Spotify is a music streaming platform developed by Swedish company Spotify AB, headquartered in Stockholm, Sweden and listed on the NYSE as of April 2018. Spotify is an attractive investment for a multitude of reasons.
For the first time in 15 years, Apple cut its revenue guidance by $5 billion due to a downturn of sales in China. Fueled by trade tensions among other issues, this is responsible for 20% of Apple’s sales. Another issue is the price of the iPhone, which can get as high as $1,000. In China, one of Apple’s biggest markets the GDP per person is only $10,000. Without the Chinese market and with the prices of iPhones reaching new heights, consumers will not buy iPhones and thus will not be able to use Apple Music. Apple Music is Spotify’s top competitor and with issues like this arising and trade wars continuing to decrease the market share for Apple Music, Spotify should reap the benefits. Additionally, Spotify already leads the market for paid music streaming as seen in the graphic below.
In addition to the above, one of the biggest IPO’s of 2018 was Tencent Music Entertainment Group (NYSE: TME). This is essentially the Spotify of China. The launch was a success despite the current jittery market conditions and Spotify owns 9% of TME. In our opinion, we have faith that the management knows how use excess capital in order to grow the business. We are willing to forego a dividend in order for profits to be reinvested.
Spotify announced in Q3 2018 it has 87 million Premium subscribers, thanks in part to Family and Student plans, which is up 5% from 83 million in Q2 2018 and up 40% from 62 million in Q2 2017. On top of that it also now has 109 million ad-supported monthly active users. That’s up 8% from 101 million in Q2 2018 and up 20% from 91 million in Q2 of 2017. Europe accounts for 36% of Spotify’s users, North America 31%, Latin America 22% and the rest of world 11% with the latter two growing at the fastest rate. Spotify surpassed expectations in Q3 2018 and with Q4 earnings on the horizon, Spotify definitely seems to have some long-term growth potential. Looking forward, gross revenue from on-demand streaming music is expected to triple, reaching $24 billion by 2025.
We are looking to buy 90 shares of Spotify stock (SPOT) for approximately $12,000. We expect to hold this stock for a 5-7 year horizon, and will continue to monitor its Premium subscriber growth going forward.
by Rory Nizolek ’19 and Kevin McNoble ’19