KEY POINTS
- Spotify is adding a lot of new listeners, especially young people in emerging markets.
- There’s plenty of room to improve monetization with price hikes and advertising.
- It should see better margins from leveraging fixed costs.
The streaming service isn’t making a profit, but this could change in the near future.
There’s plenty to like on Spotify (SPOT 0.68 percent); however, investors must be cautious about the price.
The streaming service adds more listeners than its management and Wall Street expects, with the first quarter’s net additions in the range of 26.9 million. That is 15 million higher than its expectations. Furthermore, it is able to improve the value of each user using its service in only two years. Investors in the company could be paid, but they have to be in the game. Three methods Spotify can be set up to ensure long-term success.
- The funnel’s top is expanding.
Spotify has seen a surge in listeners with ads in the last year, which could eventually result in paid-for customers.
The streaming service has gained 65 million users who have been ad-supported in the last year. A lower churn rate among ad-supported listeners powers the rapid growth. This is an excellent long-term indicator by itself, suggesting an interest in Spotify among listeners with no cost who are able to switch at a minimal cost.
Management claims that ad-supported listener growth was robust across all demographics and regions. The rest of the world is taking a more significant part of today’s ad-supported listeners than one year ago; however, 28% is higher than 23 percent. Management also emphasized Gen Z as a big contributor to the growth in free listeners in its earnings call for the fourth quarter.
It’s growing rapidly and already causing immediate effects on paid subscription growth. Spotify added 5 million paid customers last quarter instead of only 2 million. Management cited the top-of-the-funnel quality as a factor in its performance improvement.
However, the demographics of new listeners to free music — particularly younger listeners from emerging markets could cause longer conversion times than the typical timelines for Spotify. The company should compensate the investors who are patient as it converts its users in the course of time.
2. Potential price hike
Spotify can increase its prices across the U.S., especially after the biggest rivals increased prices in the last year.
Management reiterated at the first quarter earnings conference that they are continuously updating prices in global markets. It is the U.S., however, is a huge potential. Executives have said they’re engaged with record labels and believe they can raise prices as time passes.
It’s unlikely that Spotify will lose a substantial amount of its paid subscribers due to the possibility of a price increase. The network effect of the platform’s algorithmic playlists and the ability to share and discover playlists and music makes it a favourite for users.
With over sixty million North American subscribers, a one-month increase of $1 could result in significant growth in earnings and revenue for the streaming service.
3. Margin improvement
There’s plenty of leverage in Spotify’s business that can help it improve its margins.
Management is working towards a long-term profit goal of between 30 to 35 percent. The company posted an average gross margin of 25.2 percent in the first quarter, meaning much to be done.
The most significant area in which management can boost margins is advertising. The company reported a slowing in revenue growth in the macroeconomic conditions that were challenging during the initial quarter. However, the opportunity to compete with the advertising sector on radio and gain a part of the growing digital audio advertising market is still strong.
The company’s efforts to maximize its investments in podcasts following its pledge to cut back on spending in the coming year will likely be rewarded. Spotify reported an ad-supported gross margin of 3.3% in the initial quarter, a significant improvement over 2022. The long-term effects of podcasts with fixed costs on the growth of listeners could result in better profit margins for the business.
Just press play
The potential for Spotify could result in a meaningful revenue increase for the business. As the company moves towards profitability in the coming years, investors will be rewarded with increases in their shares.
Even with a rise in its price since the announcement of profits in April, shares remain reasonable, with performance-based ratios of 2.1. With a solid prospect of revenue growth and better operating margins over the course of time, investors should be content to pay the price.
Should you invest $1,000 into Spotify Technology right now?
Before you look into Spotify Technology, you’ll want to know this.
The Motley Fool Stock Advisor analyst team recently revealed what they believe to be the top 10 stocks for investors to invest in currently… And Spotify Technology wasn’t one of the top 10.
Stock Advisor is an online investment service that has beaten the stock market thrice since 2002*. They believe some stocks are more significant than the market.
Source:- https://www.fool.com/investing/2023/05/26/3-reasons-for-long-term-investors-to-get-spotify/