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Spotify: Should this market leader be added to your portfolio?

Opdateret: 3. feb.


Spotify is the market leader in music streaming, and its stock is currently trading well below its all-time high of $364.There should be plenty of growth ahead as the music streaming market is expected to grow at a compound annual growth rate (CAGR) of 14,1 % until 2027. Does the lower share price and the outlook of the music streaming market mean that it is time to add Spotify to your portfolio? In this analysis, I will share my opinion.


This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.


This analysis will be a bit different from what you are used to read in my blog. Spotify did their IPO in April 2018, meaning I don't have access to the historical numbers dating back longer than that. So instead of using the principles I have learned from my Phil Town workshop, I use the principles I have learned from the GOAT academy. I should also mention that most of the numbers I use in this analysis is from Finbox, which I believe is a great tool to easily get the numbers you need from various companies.


Before I begin the analysis, I should mention that I do not currently own any shares in Spotify. However, I do own shares in Tencent (both individual shares and through Prosus) which owns shares in Spotify. If you would like to view or copymy portfolio, you can find instructions on how to access it here. Even though I own shares in Tencent and therefore have some vested interest in Spotify, I will ensure that this analysis remains unbiased. If you want to purchase shares or fractional shares, you can do so on eToro.



Spotify was founded in 2006 in Sweden. Spotify describes itself as an audio platform and is best known for streaming music and podcasts. They are the leading company in the music streaming sector with the highest global market share, as their market share is 30,5%. It is significantly higher than the runner-up, Apple Music, with 13,7%. By the end of 2022, they had 489 million monthly active users. There are two ways for users to access Spotify's products. One option is a paid subscription, while the other is a subscription sponsored by advertisements. The segment of paid customers has higher profit margins compared to the segment of customers sponsored by advertisements. By the end of 2022, they had 205 million paying subscribers, indicating that the majority of their subscribers (294 million) are supported through advertisements. Spotify is a well-known brand, but we have noticed a decline in its market share recently. And while losing market shares does not always mean that the company doesn't have a competitive advantage, I don't think Spotify has a moat for the time being. They might develop one in the future, though.

Their CEO is Daniel Ek. He is not only the CEO but also the co-founder of the company. I like it when founders or co-founders are still involved in management, as they are usually more concerned about growing their business than their personal financial gain. Daniel Ek is a natural entrepreneur and started his first business when he was 13 years old, creating websites from his home. He later recruited students from his class to create websites using the school computers, enticing them with video games as a bribe. As he turned 18 years old, his monthly salary was $50.000. From his initial venture to the establishment of Spotify, he occupied various positions in different companies and also founded another company which he eventually sold. Looking at his educational background, he initially pursued engineering studies at the KTH Royal Institute of Technology but eventually decided to drop out in order to concentrate on his own entrepreneurial endeavors. He has shared some of his views on leadership, and he describes his leadership style as authentic. Instead of copying other leaders, he believes that one needs to focus on what is true to oneself. A leader must invest time in building self-awareness of their values, beliefs, and strengths. In a previous conference call, he discussed his leadership style and expressed his commitment to motivating teams to think bigger and work harder every day. No doubt, Daniel Ek has a very ambitious leadership style. According to Comparably, he has a high employee rating that places him in the top 5% of similarly sized companies. Personally, I really admire his entrepreneurial mindset, and I firmly believe that he has demonstrated his suitability for the position.

I don't believe that Spotify has a moat for now. I really like the management, though. Later, I will use a discounted cash flow model to calculate a price for Spotify. But before I do that, let's take a look at some key financial metrics.



Below, we will examine some key financial metrics for Spotify over the past three years. The first thing that comes to mind is that they have been able to grow their revenue each year, which is always nice to see. I'm not too impressed with the gross profit margin, and it isn't encouraging to see that the gross profit margin was the lowest in three years in 2022. Spotify achieved a positive operating income, EBITDA, and EBIT in 2021, but all three turned negative again in 2022. As we can see from the net income, Spotify has not yet turned profitable, although they came close in 2021. I know that 2022 was a challenging year for most companies, but I'm a bit disappointed with Spotify's numbers. I had hoped and believed that we would see better results than these. Hopefully, Spotify can get back on track to profitability in 2023. However, at this point, I do not find the numbers convincing..



Before we proceed with the discounted cash flow model, I would like to examine the risks and potential of Spotify. One risk is competition. Spotify is operating in a highly competitive sector and is up against companies that can offer more than just music and podcast streaming, such as Apple, Amazon, and Google. It has resulted in Spotify losing market sharein the last couple of years, dropping from a 34% global market share in 2019 to a 30,5% global market share in 2022. At the same time, Spotify lacks a competitive advantage that would protect them from these competitors. Growth is slowing down. As I mentioned earlier, Spotify earns higher margins from paying subscribers compared to advertising-sponsored subscribers. In the past year, the growth of paying subscribers has slowed down each quarter. In 2021, the number of paying subscribers grew by 16% compared to the previous year, and in 2022, it grew by 14%. The slower growth will affect margins, as we saw above, where Spotify had the lowest gross profit margin in three years. Capital spending. Spotify has yet to turn a profit despite its name recognition. Therefore, I believe it is somewhat questionable for them to decide to sponsor FC Barcelona. Financial terms of the contract haven't been disclosed, but the deal is believed to be worth around $308 million per year for sponsoring FC Barcelona. While management was enthusiastic about the sponsorship in conference calls, I believe it is questionable whether an unprofitable company should spend this much on a sponsorship. However, these are just my own personal thoughts. I could be wrong.


There are also potential opportunities for Spotify moving forward. New markets. Management has often expressed their belief in the significant potential for growth in monthly active users (MAU) in Southeast Asia and India. They have emphasized the large populations in these regions as "a tremendous opportunity from an MAU perspective." And while core markets will still be the main contributors to revenue for a while longer, management believes that emerging markets will catch up and contribute to the pace of growth. Podcasts. Podcasts are different from music streaming. In music streaming, Spotify has to pay the labels and the artists per stream. Since most of their users still have advertisement-sponsored subscriptions and not all songs come with ads, the margins are much lower for advertisement-sponsored users. Podcasts are another thing, as all podcasts come with advertisements, and as the audience grows for a podcast, so does advertising revenue. However, the largest podcasters are on a fixed contract, meaning that the growing advertisement revenue goes directly to Spotify. Hence, it isn't surprising that management has stated that "podcasting should be a better business model than music from a gross margin perspective."Marketplace. Management talked a lot about the Marketplace in the last couple of earnings calls. According to management, Marketplace "enables creators to expand their audience, engage with their audience, and monetize their audience in a new way." Spotify will naturally take its share if the creators are successful in monetizing their audiences.They said that Marketplace offers everything from live events to merchandise and even NFTs. The marketplace is still in its early stages, and Spotify is conducting numerous experiments on it. Nonetheless, the growth marketplace exceeded management's estimated expectations of EUR 200 million in 2022. Management has high hopes for the marketplace and believes that this type of creator and consumer interaction will be something that will drive profitability in the future.



I have now investigated the financials, risks, and potential of Spotify. I will now examine the price by utilizing a discounted cash flow model. To do so, I will need some numbers that you can see below. The numbers are the 2022 figures, which I found on Finbox. However, I have determined the perpetuity growth rate and the discount rate myself.The reason I chose a 3% perpetuity growth rate is that it typically falls between the historical inflation rate of 2-3% and the historical GDP growth rate of 4-5%. I decided to go with a middle option. The chosen discount rate of 12% is because it falls within the typical range of 9-12%. I decided to go with the highest option due to the current market conditions.Remember that all the numbers used in these calculations are in millions.



I also need to determine how much EBIT, Depreciation & Amortization, and Net Working Capital will evolve over the next couple of years. EBIT was negative in 2022, but I believe that Spotify will be able to achieve a positive EBIT 50million in 2023, which is less than half of what it was in 2021. According to Finbox, EBIT is expected to grow by 32%,but I have decided to use a 30% EBIT growth moving forward. I calculated a 30% annual growth in Depreciation & Amortization as well. Finally, I decided to keep the Net Working Capital at the 2022 figure of -2.662 because it is the highest recorded value. I haven't found a convenient method to share my entire spreadsheet here, but after conducting my calculations, I determined that the intrinsic value of Spotify is $86.


Having investigated Spotify, I find the company interesting. I'm particularly curious if they can continue to grow theMarketplace. I also appreciate their focus on developing their podcast business. However, there are too many aspects of Spotify that I don't like as an investment right now. I don't like that they haven't been able to be profitable yet, even though it will probably happen soon. I don't like that the margins are relatively low, as they are losing market share. Additionally, I'm not sure I understand the decision to spend so much money on a sponsorship. If Spotify manages to become profitable and increase their margins, I might consider investing in the future. However, at this time, I will not invest in Spotify.


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