Hamish Corlett, from our newest Core Fund Manager, TDM Growth Partners, presented Spotify at the 2019 Sohn Hearts & Minds Investment conference.

As with Tesla, the Spotify brand is instantly recognisable to most people. It is an international media services provider, whose primary business is its audio streaming platform. Founded by Daniel Ek and Martin Lorentzon in 2006, a year before Steve Jobs released the first iPhone, it provides music, videos and podcasts to its 271 million monthly active users in 79 countries, including most parts of Europe, the Americas, Australia, New Zealand, and parts of Africa and Asia.

The company went public on 3 April 2018, via an Initial Public Offering, where Spotify did not actually issue any new shares to the public, but rather the existing shares were taken directly to market. The market capitalisation immediately following the IPO was $26B.

Spotify operates under a ‘freemium’ business model, whereby the basic services are free (with advertising), and additional services with an ad free experience are offered via paid subscriptions. There are currently 124 million paying subscribers to the platform. Revenue is generated by premium streaming subscriptions, and advertising placements to third parties. Spotify offers advertisers ten different types of advertising formats, described in 2016 as: Branded Moments, Sponsored Playlists, Sponsored Sessions, Video Takeovers, Audio, Display, Overlay, Homepage Takeovers, Branded Playlists, and Advertiser Pages. These advertisements vary in size, type and user engagement.

So why did Hamish recommend the stock to the audience?

To give everyone an idea of the scale Spotify has already achieved, Hamish came onto the stage with AC/DC’s “Back in Black” playing. This is the second highest selling album of all time, having sold 50 million copies from 1980-2015. Back in Black has already been played 1.5 billion times on Spotify, and every time it is played, the musicians are paid. He firmly believes Spotify saved the music industry from the internet piracy threat of the early 2000’s that very nearly destroyed it.

Spotify earns revenues of $7.5B, which is increasing at 30% per annum. Hamish believes Spotify can compound its capital at 25-40% from here.

How?

Hamish said that to be the leader in audio streaming, you need to dominate the ‘free’ market. At the moment, 55% of Spotify subscribers use their free version, while 45% are paying subscribers. 90% of Spotify’s current revenue comes from paid subscriptions, while the remaining 10% comes from advertising revenue.

The two biggest competitors to Spotify's free offering, Apple and Amazon, are seemingly not challenging Spotify in this space. Apple currently does not have a free offering, while Amazon has just 2 million songs compared to Spotify's library of 50 million songs. He estimates that the audio market will be a $60B market, with ⅔ of that coming from the free/ad supported market. Currently, the vast majority of that free market is in commercial radio.

With the advent of podcasts, Hamish believes this will be a game changer, and Spotify are at the forefront, with over 25 million podcasts already available on their platform. He told us that brand advertising on podcasts should increase the free user monetisation from about 50c/month per user currently to $2-3/month per user. This in turn will increase the ability to deliver more product to the free users, which will bring more new free users to the platform (some who will convert to paying).

Hamish ended his pitch by telling us that he believes the FAANG stocks, the five clear market leading consumer internet companies, comprising Facebook (the leader in social media), Apple (devices), Amazon (e-commerce), Netflix (video streaming), and Google (search) will shortly become the FAANGS suite, with Spotify being the clear market leader in audio.

Spotify Technology: Company Details

Ticker code: SPOT.US

‍Market Capitalisation: USD $25bn

Average Daily Volume: 1.6 million shares / daily

52 week range: USD $110.57 - $161.38

Bloomberg consensus: 19 Buys, 9 Holds, 4 Sells

Price target: USD $169.63

Spotify Technology: Share Price History