The last week was rough for Spotify (NYSE: SPOT) stock. A shortfall in subscriber growth numbers announced on the earnings call disappointed the market along with a second-quarter loss of 47 cents per share. This was below an already pessimistic analyst’s consensus estimate for SPOT of a 35 cents per share loss and an 81.71% increase over losses from the same period last year.
Paying subscription numbers for SPOT increased by eight million, taking it to 108 million premium subscribers, but it missed its forecast of 8.5 million new subscribers. Upon the bad news, SPOT stock dropped from $153 to $147.
Credit Suisse reaffirmed its Underperform rating on SPOT stock with a target price of $120. While it has recovered back to $153, SPOT stock is still off the 52-week high of $196 from late last summer.
Despite the disappointing earnings call, now may not be the right time to bail out on SPOT stock.
Here are five reasons why SPOT may deliver long term value:
Podcasts and Music Market Fuel SPOT Growth
1) Revenue Growth Strong: Moving away from the critical metric of growth in paid subscriber numbers, the all-important factor for investors is that the income statement for SPOT stock is strong. Total revenue was $1.85 billion in Q2, representing growth of 31% year-over-year. This top-line figure was compromised of premium revenue totaling $1.67 billion, a 31% year-over-year increase, and ad-supported revenue of $183 million up 34% from last year.
2) Podcast Market Booming: Podcasts have been around for a decade with few firms being able to commercialize on the product. Spotify can. From an obscure feature available only to Apple (NASDAQ:AAPL) iTunes subscribers in the past, podcasts have experienced massive growth. SPOT has already announced a $500 million investment in their podcast product line. They are well-positioned to leverage this market. Podcasts are right at the center of the company’s core strength: streaming high-value audio content.
3) Global Music Market Strong: While sales of traditional CDs have slumped for over a decade, the global music market is in the middle of a resurgence led by streaming. According to Goldman Sachs analyst Lisa Yang, the global recorded music industry will double in size from some $20 billion today to a whopping $41 billion behemoth by 2030, thanks mainly to the growth of streaming.
4) Spotify is Big Player: Size matters. While SPOT has formidable competition from the likes of Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), and Apple, Spotify has a leading market share of 40%.
5) High Barrier of Entry: Not only is streaming music expected to be a hot market, but it is a maturing market in that it will be tough for any start-up to enter. SPOT is the market leader. By comparison, its next-largest competitor, Apple Music, has only about half the subscriber base. Amazon, the third-largest player in the streaming music market, could simply give away their streaming service for free.
Amazon-ized Market Unlikely
A similar scenario threatened the traditional book publishing industry a decade ago when AMZN announced they would be entering the publishing business. Amazon’s publishing strategy was to launch their Kindle Book reader, attract established and new authors, offer them higher royalties, and sell everything in e-book format at a far lower price than traditional paper books. A decade later, the traditional book publishing business is still in business – albeit with a restructured operating model.
Streaming is a growing market which is unlikely to become an Amazon-monopolized market. SPOT is well-positioned to leverage their core expertise, size, status, existing subscriber base, and sole commitment to commercializing audio content.
Last week’s announcement for SPOT may have been bad. However, in the longer run, SPOT looks like a buy.
As of writing, Theodore Kim does not hold any position in any of the above-mentioned stocks.
