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Original Podcasts Could Spark a Big Breakout In Spotify Stock

Spotify is in the early stages of leveraging original content to promote scalable growth

Back in mid-2018, I was bearish on shares of audio streamer Spotify (NYSE:SPOT), mostly for these reasons: there was too much hype surrounding the company, the valuation was too rich, competition threatened growth, and there wasn’t any original content to help fend off that competition. Indeed, from mid-2018 to the end of that year, Spotify stock fell from nearly $200, to just above $100.

Original Podcasts Could Spark a Big Breakout In Spotify Stock
Source: Spotify

In early 2019, though, I turned bullish on Spotify stock.

Everything had changed. All the hype surrounding the company had faded. The valuation had compressed to reasonably cheap levels. The company had continued to outpace the competition with robust subscriber growth. Most importantly, Spotify started developing original content through original podcasts. Consequently, year-to-date, Spotify stock has rallied nearly 20%.

This rally is far from over. Why? Because the most important growth catalyst for this company — the development of original content — is only gaining momentum.

Over the past two months, Spotify has shelled out nearly $450 million to acquire three different podcast-related companies. These acquisitions pave the path for Spotify to produce original podcast content in volume very soon. This high-volume, original-podcast production puts Spotify on track to have a Netflix (NASDAQ:NFLX) moment wherein the company reaches escape velocity in terms of subscriber growth, and never looks back.

In other words, original podcasts could spark a big breakout in Spotify stock soon. As such, I’m doubling down on my 2019 SPOT bull thesis: it’s a matter of when, not if Spotify has its Netflix moment.

The Netflix Breakout Happened In 2016

For all intents and purposes, Spotify today is where Netflix was back in 2015-16.

Throughout 2015, Netflix was the leading SVOD (streaming video on demand) player by virtue of being the first on-demand, paid subscription player in the market. But everyone was worried about competition because Netflix didn’t have much of a content moat to fend off new entrants. Sure, Netflix had some original content at the time like House of Cards and Orange is the New Black, but not enough to really convince subscribers to join and/or stay in a competitive SVOD landscape.

Then, in 2016, Netflix turned on the original-content engines. They started to leverage their wealth of consumer-watching data to inform content production, while concurrently pumping billions of dollars into original-content production. Net result? They launched original content mega-hit Stranger Things in summer 2016, which led to huge sub growth in the summer quarter. Netflix stock popped from under $100 to $120.

Netflix stock hasn’t looked back since, as the company continued to leverage robust original-content product. In turn, this move got consumers to both join and stay on the Netflix platform in a competitive SVOD marketplace.

The Spotify Breakout Could Happen In 2019

Spotify stock is due for a similar breakout soon thanks to original-podcast production.

Today, Spotify is the leading streaming audio platform by virtue of being the first player in the market. However, everyone is worried about competition because Spotify doesn’t have much of a content moat. There are some original podcasts, but not many, and that leaves the door open for competitors to steal share.

In 2019, though, Spotify is turning on the original-content engines, much like Netflix did in 2016. They have made three podcast-related acquisitions in two months (Gimlet Media, Anchor FM, and Parcast). Plus, they are launching new original podcasts left and right. There’s also a new original content chief in town. In other words, everywhere you look, Spotify is starting to get really serious about producing original content at scale.

Inevitably, this will pay off. The podcast industry has been a huge grower over the past several years, going from sub-10% active penetration in 2008, to 32% penetration today. But with just one in three Americans listening to podcasts every month (versus essentially every American watching TV or listening to music), the potential for growth in podcasts remains tremendous.

As such, if Spotify can land just a few original content mega-hits in the secular-growth podcast industry, this company will have a 2016 Netflix moment. Moreover, it will kick-start a virtuous cycle that promotes scalable growth. Subscribers will flock to and stay on the platform for the original content. That will grow Spotify’s subscriber base and give them bigger resources and more data. Then, they can leverage that momentum to create better content, drawing even more subs.

Lather. Rinse. Repeat.

Bottom Line on SPOT Stock

Spotify stock was one of my favorite stocks earlier this year. It remains so today. This company is making all the right moves to ensure a bright future in the secular-growth audio-streaming market. Further, SPOT appears to be in the early stages of leveraging original content to promote scalable growth.

To be sure, Spotify has to produce quality original content in order for this bull thesis to play out. But with over 200 million monthly active users, Spotify has sufficient underlying user data to do just that.

As of this writing, Luke Lango was long SPOT and NFLX. 


Article printed from InvestorPlace Media, https://investorplace.com/2019/03/original-podcasts-breakout-spotify-stock/.

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