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Spotify Stock Represents the Future of Radio

Spotify suffered a bigger-than expected-loss in the second quarter but it remains a long-term play

Shares in Spotify (NYSE:SPOT) fell sharply over the last week of trading. Why? Investors realized that Spotify stock is not immune to the novel coronavirus depression.

Spotify (SPOT) logo is on the screen of a smartphone with headphones plugged in.
Source: Kaspars Grinvalds / Shutterstock.com

Despite a June quarter loss of $356 million, $1.91 per share, on revenue of $1.9 billion, Spotify stock entered trading July 30 worth $48 billion. Shares are up over $100 each from where they started the year.

Still, streaming is not immune to the virus.

Spotify’s results were well short of expectations. Analysts had been expecting a small loss of 49 cents per share on $2.1 billion of revenue, and hoping for an even-smaller loss of 29 cents.

But in this case, patience may be rewarded.

The Two-Sided Marketplace

Despite competition from Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN), Spotify has gained a fat 35% of the streaming music business. Monthly average users at the end of June stood at 299 million.

The Swedish startup is beating the giant cloud companies thanks to its focus on what CEO Daniel Ek calls the “two-sided marketplace.” The idea is to generate revenue not only from paid subscribers and advertisers, but from tools that let artists and labels reach those listeners.

Proof it works lies in a new deal with Universal Music Group, co-owned by Vivendi (OTCMKTS:VIVHY) of France and Tencent (OTCMKTS:TCEHY) of China, for tools like Spotify’s Marquee, which promotes new music as it’s launched.

Labels had earlier complained loudly about the approach. They said they were paying Spotify twice, once as a percentage of revenue to stream, a second time for promotion. But the scaled tools put minor artists even further from profit than before. Streaming brings in very little money, except for major acts — and even they complain. This makes label support, which can cost an artist their future, the only way to break through the noise.

Ek hears the artist complaints but says those who are making a living off streaming don’t talk about it. He says streaming is a different animal, requiring a “continuous dialogue” with fans. Artists complaining “are predominantly people who want to release music the way it used to be released,” he said, as albums or CDs.

Owning the Content

Future growth depends on Spotify converting free, ad-supported listeners into paid subscribers. Figures from Business of Apps indicate that less than half of Spotify’s listeners are paying, although the numbers keep rising. They also show Spotify with a market share equal to that of Apple and Amazon combined.

Staying ahead means getting more of the streaming transaction.

While Spotify pays labels to stream music, it can own podcasts. The company has spent $1 billion on them over the last year, including $100 million for just one. It paid $250 million to sportswriter Bill Simmons for his podcasting company, The Ringer.

The Bottom Line on Spotify Stock

Investors are paying almost six times revenue for Spotify stock for much the same reason they pay a huge premium for Roku (NASDAQ:ROKU).

It’s because they believe the company that controls the marketplace controls the market. They also believe in Daniel Ek. Thanks to his focus on new features, and his vision of the future nature of radio, he’s beating the cloud giants, the labels, the whole radio industrial complex.

iHeartMedia (NASDAQ:IHRT), which once thought it controlled radio, is now worth just over $500 million. Sirius XM (NASDAQ:SIRI), which thought it would succeed iHeartMedia with its satellite service, is now worth half what Spotify is. This is despite following Spotify into podcast ownership, paying $325 million for Stitcher.

Streaming is yet another example where you bet on the jockey, not the horse. Investors think Swedish entrepreneur Ek knows more about the music and radio business than all the American labels and artists who built it.

So far, they’re right.

Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AAPL and AMZN.


Article printed from InvestorPlace Media, https://investorplace.com/2020/07/spotify-stock-earnings-future-music-long-term-buy/.

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