Company Name: Spotify
Ticker symbol: SPOT.US, SPOT.EU
Entry price: $276.9/€234.9
Target price: $360/€300
Horizon: 3–6 months
Spotify (SPOT.US, SPOT.EU) is one of the world’s largest streaming services that gives you an opportunity to legally listen to music, audio books and podcasts.
What’s the idea?
To gain on stocks that may grow owing to outreaching new markets, the unique content, proceeds from advertising, and increased cost of paid subscriptions.
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Why do we like Spotify?
Spotify stocks dropped by 26%. This occurred against the background of conservative forecasts on revenue growth in 2021 and overall negative dynamics demonstrated by technology sector companies. A decreased price is a great opportunity to purchase the stocks that have several reasons to grow in the short-term.
Reason 1: company’s entry into new markets
During its recent Stream On conference, Spotify announced the platform updates; however, the most important news were Spotify’s expansion to 80 new countries, According to Spotify, these new markets embrace over 1 billion people, more than 500 million of which are Internet users. Hundreds of thousands people from the countries, such as Nigeria, Pakistan and Bangladesh, may now get access to the Spotify’s streaming library.
Owing to the above decision, Spotify will raise its chances for attracting 1 billion users – this is the long-term goal set by its management. The platform currently has 345 million users, 155 million of which have paid accounts. The audience expansion will contribute to further increase in proceeds from advertising and paid subscriptions to premium accounts.
Reason 2: expanding the share ın the podcast market
Spotify continues to actively develop podcasts, as it regards this area as having a tremendous potential. According to The Infinite Dial 2020 from Edison Research and Triton Digital, in the US, podcasts cover the audience exceeding 100 million people. At present, 75% of Americans are familiar with podcasts. To compare, last year this figure amounted to 70%. A half of Americans aged 12 to 34 (the key demographic group for advertisers) listen to podcasts on a daily basis, and those who listen podcasts weekly spend 6 hours and 39 minutes on it in average. Furthermore, the figures continuously rise.
While Spotify has a strong lead in streaming music, the company has not yet reached any leading positions in podcasts. Apple, the industry leader over the last ten years, has been providing access to podcasts through iTunes and Apple Podcasts since 2005. Spotify only added podcasts to its service in 2015, and over 5 years, it only managed to augment its library to over 2.2 million podcasts; however, several dozens of them create an actual competitive advantage.
The company invests enormous resources in original and exclusive podcasts to increase users’ loyalty to the service, and this strategy is efficient. Its management asserts that, after The Joe Rogan Experience became exclusive on Spotify in December, overall interest in the platform has raised, and a spike in the number of new users was observed. As a result, the company announced that it entered into contracts with several more new celebrities, which will appear on the podcast list, including ex-President Barak Obama, Bruce Springsteen, Ava DuVernay, Brene Brown, Kim Kardashian, Russo brothers, etc.
As of now, Spotify demonstrates high rates of growth in the podcast audience: in Q4 2020, over 86 million users were listening to podcasts – by 99% more than over the same period in 2019. According to analytical forecasts, owing to the current strategy, Spotify has an opportunity to leave Apple behind in terms of the market share as soon as by the end of this year.
Reason 3: improved efficiency of podcast advertisements
Podcast advertising is at its early stage; however, announcing the podcast advertising platform Streaming Ad Insertion, SAI, and acquiring Megaphone and Anchor enables Spotify to set itself up to conquering a huge share in the podcast advertising market, the potential size of which may exceed USD 30 billion. The company actively creates and improves its own advertising instruments relying on the existing mechanisms implemented by other players.
At present, Spotify has an opportunity to make dynamic ad insertions into a podcast. This enables advertisers to target advertisements to specific groups, which is much more efficient. It is this targeting type that makes other advertising market players, Alphabet and Facebook, so profitable. Spotify attempts copying their model and applying it to audio formats. The company collects a vast amount of data on users, which it subsequently analyses and applies to raise the advertising efficiency.
In addition, Spotify’s advertising instrument, Ad Studio, evens up the rules for major and minor players in placing streaming ads. This is also a successful copy of the advertising models used by Google and Facebook.
Thus, with its global base of listeners, the data, which the company may use to target advertising, and two advertising instruments, Spotify creates a value proposition for both content producers and advertisers, which is unparalleled in the podcast industry.
Reason 4: increased cost of subscriptions
During this year, Spotify plans to increase the cost of its paid subscriptions in certain markets: this measure will contribute to the growth in company’s income and will likely have no impact on the size of the paying audience. Netflix is taking similar steps to increase the cost of subscriptions, and its strategy proves to be fairly efficient.
Reason 5: financial position
Spotify keeps demonstrating high revenue growth rates: last year, the increment amounted to 16.5%, and annual revenue reached €7.88 billion. However, the company remains unprofitable, because its annual operating loss is €293 million, and compared to 2019, it has risen by almost €220 million. This is primarily due to increased SG&A and R&D expenses.
The company’s balance sheet is strong, its debt is €577 million, and liquid funds amount to €1.75 billion. This is fair enough to continue geographical expansion, make strategic merger and acquisition transactions, and develop the podcast area. The company generates positive operating cash flow, which amounted to €259 million in 2020.
By its P/S ratio, the company is traded at the 5.4х level. In March 2021, several investment banks and companies increased their valuations of Spotify stocks:
- JPMorgan Chase — $385;
- Canaccord Genuity — $400;
- Rosenblatt Securities — $425;
- Evercore ISI — $360.
How to take advantage of the idea?
- Buy stocks at $276.9/€234.9
- Allocate no more than 2% of your portfolio for the purchase. To build a balanced portfolio, you can use the recommendations by our analysts.
- Sell when the price reaches $360/€300.
How to Buy Spotify?
If you don't have an investment account yet, open it now: this can be done online, in just 10 minutes. All you need to do is fill out a short form and verify your account.
After opening an account, you can buy shares in either of the following ways:
Freedom24 Web Platform: In the Web Terminal section, type SPOT.US, SPOT.EU (Spotify ticker in the NASDAQ) in the search box, and select Spotify in the results. Open a secure session in the trading window on the right, select the number of shares you want to buy, and click Buy.
Freedom24 iPhone or Android App: Go to the Price screen and tab the search icon in the top right corner. In the search dialog that will show up, type SPOT.US, SPOT.EU (Spotify ticker in the NASDAQ) and select Spotify in the search results. You will then see the stock in the market watch; tap it and go to the Order tab in the dialog that shows up. Specify the number of shares you want to buy and click Buy.
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