Spotify Technology SA (NYSE:SPOT) is a Stockholm, Sweden-based audio streaming and media services platform that’s making waves this decade. The company spent about $1 billion over the past two years buying original podcasting content and seems to be building an audio Netflix Inc (NASDAQ:NFLX).
With stiff competition and an expensive overhead obligation to major music labels, is Spotify stock a buy?
The company has over 350 million monthly active users, with 158 million premium subscribers as of its most recent quarter.
Spotify is a cultural staple that’s pivotal to the modern music industry, but it’s facing increased competition from rivals like Alphabet’s YouTube, Amazon, and SiriusXM. And the company is losing money as it pays to bring more talent in house.
Its drop-in audio app Greenroom and a focus on high-definition audio could be the keys to unlock major profitability for investors over the next decade. Short-term expenses represent long-term benefits that may revolutionize the businesses of music and podcasting.
Will Spotify sing a happy tune for investors’ portfolios?
Spotify Freemium A Massive Success
Spotify is a Swedish streaming service that holds a vast library of music, podcasts, and video content from creators around the world. The company offers an ad-supported free version, along with paid subscriptions ranging from $5-$20 per month. In addition, it offers bundled services with Hulu.
The platform is available on most devices and platforms, and users can access millions of tracks and projects.
Major record labels adapted and soon started counting Spotify streams in official counts from Billboard and SoundScan. This is considered a big win in the digital economy; however, the company did draw the ire of artists like Taylor Swift and Jay-Z over the years for artist payouts.
This caused an artist collective to create a rival in Tidal, which was bought by Square for $302 million in May 2021. That sets the stage for the next generation of the creator economy and audio revolution.
What Is Spotify Greenroom?
In March 2021, Spotify announced that it had acquired Betty Labs, makers of a live drop-in audio app called Locker Room. Initially sports-focused, this Clubhouse clone is designed to compete with Alpha Exploration’s revolutionary social audio platform.
The launch came with a Creator Fund promising to reward creators for drawing crowds to rooms on Greenroom. Should a show become truly monetizable, the company already has an in-house production process in place for podcasts like Joe Rogan Experience, Call Me Daddy, and Reply All.
If successful, the platform could serve as both a proving ground for new content and a way for established creators to foster fan communities. Of course, it will need deep pockets to get there.
Spotify Revenue Growth High, Margins Low
Spotify ended 2020 with $2.16 billion in total revenue, which is a 17 percent year-over-year growth rate. Still, it had a relatively low 26.5 percent gross margin for the year which led to a $68 million loss and -3.2 percent operating margin.
This margin is due to the high payouts the company dishes to record labels for streaming rights of their archives. It bottlenecked free cash flow for the year to $74 million.
By the end of the first quarter 2021, Spotify held $8.03 billion in assets, which includes $2.44 billion in cash and equivalents. This gives it plenty of cash to finance its plans to compete with a drop-in audio upstart that is valued at $4 billion.
Is Spotify Stock a Buy?
As the clear leader in audio streaming, Spotify already more than doubled in value from 2020 lows, but it’s been a rocky road in 2021. The stock is a long way off its 52-week high of $387.44. Nevertheless, it has a business model to grow beyond its current level of ballpark $50 billion.
Its strategic plans and acquisition of Greenroom should lead to sustained top line growth. It will act as a unique social element to the platform that could make it unrivaled. Imagine listening to a Justin Bieber song or Joe Rogan podcast and having a popup invite you to talk to them live.
That’s the future Spotify is working toward, and if successful, its homegrown talent could be valuable enough to lighten the load of its financial obligations. But that’s a big if that has a lot of risk attached.
Spotify Still Not Profitable
The biggest concern when investing in Spotify is the financial obligations it has to meet to stay in business. The music industry is expensive, and the company still isn’t profitable. It’s spending heavily in the short-term which is crushing margins.
And Greenroom is not fully proven yet. Not only could the trend not pick up like anticipated, but the company faces stiff competition. Rivals like SiriusXM (SIRI) and Apple have deep content archives and in-house talent themselves. These content wars could define the 2020s, which creates uncertainty about whether a winner-take-all market is feasible. We also can’t discount Clubhouse finding a way to steal the company’s thunder in the drop-in audio race.
Is Spotify Stock a Buy? The Bottom Line
Spotify is the leader in audio streaming, and while giants like YouTube challenge the throne, it has a plan to scale beyond them. It’s happening in social audio, where its Clubhouse clone Greenroom is poised to find homegrown content that can be held within the Spotify archive.
Of course, it’s competing with Clubhouse in the race, and many large tech firms are catching up. It’s going to be a long road that defines the creator economy of the 2020s, but Spotify has a massive audience and is unlikely to be dislodged anytime soon.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.