8 to 80 Spotlight: Spotify

By Charlie Bilello

22 Nov 2020

A new series covering companies in the Compound 8 to 80 Portfolio

1) Why is Spotify an 8 to 80 Brand?

With 320 million monthly active users and 144 million subscribers, Spotify is available in 92 countries and used by people of all ages.

At 35% market share, Spotify is currently the world’s biggest music streaming platform.

Source: Counterpoint

2) What are its growth and financial trends?

Spotify last reported earnings on October 29, 2020.

Monthly active users (MAUs) grew 29% year-over-year to 320 million, exceeding expectations.

The fastest growth in users came from outside the US, with Latin America up 30% in the past year and the “Rest of the World” category growing 51%.

Here is the breakdown in MAUs by Region…

Total MAUs by Region (Graphic: Business Wire)
Source: Spotify

Premium subscribers increased 27% over the past year to 144 million, beating expectations.

Here is the breakdown in subscribers by region…

Subscribers by Region (Graphic: Business Wire)
Source: Spotify

Revenues were up 20% over the prior year to $2.31 billion, a new high. Of this, a little over 90% came from subscriptions while the remainder came from ads. Ad revenue bounced back in Q3 (+15% YoY) after a rare decline in Q2 (-21% YoY).

Created in YCharts

Spotify reported positive free cash flow of $123 million but a net loss of $118 million during the quarter.

Created in YCharts

Spotify is forecasting continued growth in MAUs and Subscribers in Q4

3) The Climb

Spotify has single handedly changed and perhaps even saved the music industry, but its success did not come overnight. There were many difficult years along the way.

Founded in 2006 by Daniel Ek and Martin Lorentzon, they set out to solve the growing piracy problem (interesting connection with Napster) by creating a better product.

From Ek in 2010:

“I realised that you can never legislate away from piracy … The only way to solve the problem was to create a service that was better than piracy and at the same time compensates the music industry.”

It took two and a half years for Ek to finally strike a deal with the record labels to begin operating in Europe, and then another two years after that to gain rights to stream in the US (good interview here).

These were not easy times, as Ek later revealed that he was “about to have a breakdown” before the streaming launch in 2008.

But Ek persevered, and Spotify went public in April 2018 via a direct listing.

The stock ($SPOT) initially traded higher, only to reverse course with a 45% drawdown. It came back, though, and broke above its 2018 highs in June of this year.

Created in YCharts

4) What are major risks to future growth?

Spotify has a number of large competitors in the streaming space, including Apple, Amazon, and Google.

Spotify is no longer a small player (market cap of $50 billion), but its trillion-dollar competitors are in a different league with some enormous advantages, including massive platforms from which to promote from (phones, tablets, operating systems, Alexa/Google Home, etc.). They also have the luxury of subsidizing any losses from streaming with other highly profitable business lines.

To continue to grow, Spotify will have to continue to improve its offering with new technology features and exclusive content.

They will also need to continue to diversify beyond music (they are on that path with 22% of MAUs engaged with podcasts last quarter). An early mover in the podcast space (see purchases of Gimlet Media, Anchor, Parcast, and The Ringer), Spotify made headlines again this May with a $100 million licensing deal with Joe Rogan. More deals like this are likely to come as streaming services look to differentiate their offerings.

Spotify will also have to prove that they can turn consistent revenue growth into consistent profitability, though investors appear to be giving them a pass for the time being (similar to Amazon in its early years).

From a stock perspective, valuation is the primary concern, as is the case with many tech companies today. Trading at 5.7x sales, expectations are high, making Spotify vulnerable to multiple compression should it fail to meet or beat investor forecasts.

Created in YCharts

5) Howard’s Take

“Spotify has been a new addition in 2020 to my 8-80 portfolio. Spotify is a founder led company that has never had it easy. It has battled the music industry (a business with terrible margins) and internet juggernauts around the world to build a top global brand. I believe the podcast and AirPods have helped make Spotify a buy the dip company for the very long term.” – Howard Lindzon

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Disclaimer: All information provided is for educational purposes only and does not constitute investment, legal or tax advice, or an offer to buy or sell any security. For our full disclosures, click here.

About the author

Charlie Bilello

Charlie is the founder and CEO of Compound Capital Advisors.

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