The past decade has been tumultuous for media companies. Streaming has taken over the video and music markets. That’s created winners and losers struggling to adapt to a digital world. A pioneer in streaming music, Spotify (NYSE:SPOT), remains the world leader. SPOT stock is up 86% since the company went public three years ago.
Like so many tech stocks, SPOT was hammered by a broad tech sector sell-off that began in February. Up to Feb. 19, when it closed at $364.59 (an all-time high), SPOT stock was up 17% to that point in the year. It then dropped 29% over the course of three weeks. Shares have recovered slightly, but are still lower than they started in 2021.
Spotify stock has a “B” rating in Portfolio Grader. It’s not without risk, but offers good growth prospects. And the current price makes it worth considering.
Here’s what you need to know about Spotify.
No. 1 for Streaming Music
Every tech company in town has a streaming music service, but Spotify remains the global leader despite significant competition. The company closed out 2020 with 345 million users (155 million of those paid subscribers) and a market share pegged at between 32% and 34%.
Spotify is estimated to have more than double the number of paid users of its closest rival, Apple’s (NASDAQ:AAPL) Apple Music.
The Spotify service counts 70 million songs in its catalog, and that grows at a rate of 60,000 new tunes added ever day.
After Podcasting, Spotify HiFi Music Coming Soon
With such a massive song catalog – and one that is similar to the music library offered by rival streaming music services, Spotify can’t afford to sit still.
In recent years, it has begun to double-down on podcasting, counting on the format to bring in more listeners. At the start of 2020, Spotify had more than 500,000 podcasts available. Last July, the company paid a whopping $100 million to make Joe Rogan’s popular podcast “The Joe Rogan Experience” a Spotify exclusive.
Podcasting has been bringing in additional subscribers. The company is working through monetization of the service. That included the introduction of ads on podcasts last year. Spotify has also floated the idea of paid podcast subscriptions.
A more recent development to rope in new users is the upcoming Spotify Hi-Fi service. Taking advantage of the premium wireless headphones that are increasingly popular, the company will launch lossless Spotify HiFi later this year. It delivers CD-quality audio. The price has yet to be announced, but competing streaming services with high resolution music options charge a premium.
Challenges for Spotify
Spotify may be the streaming music leader, but it has its challenges. Virtually every big tech company is breathing down its neck, plus it struggles to reach profitability. In 2020, the company reported revenue of $10.8 billion, but an operating loss of $696 million.
There are some fundamental challenges facing the company. Spotify has always had a tumultuous relationship with the musicians that make up its song library. That’s erupted on a regular basis. Examples include a $150 million lawsuit alleging Spotify was playing songs without owning the copyright. Also, a 2019 “artist revolt” occurred after Spotify appealed a court decision that would force it to pay higher royalties. And there was a 2020 campaign seeking to force the company to triple its royalty rates.
With Spotify struggling to achieve profitability, the threat of having to pay more for music is a big problem. How this ultimately shakes out is going to be a big part of the SPOT stock equation.
And then, there’s Apple. The tech giant is Spotify’s biggest streaming music competition. But Apple’s hardware – iPhones and AirPods – and various platforms like iOS, CarPlay and AirPlay are also a huge market for Spotify. The company picked a fight with Apple in 2019, alleging antitrust behavior through the App Store. The goal was to eliminate the 30% fee Apple was scooping from Spotify subscriptions through its iOS app. Apple responded, trashing Spotify’s treatment of musicians:
Underneath the rhetoric, Spotify’s aim is to make more money off others’ work. And it’s not just the App Store that they’re trying to squeeze – it’s also artists, musicians and songwriters.
The two companies remain at odds. Ultimately, a win could see Spotify keeping more of its subscription revenue generated through the Apple ecosphere. That would help the company’s battle for profitability. But as the publisher of the game Fortnite discovered, it can be risky to poke this bear.
Bottom Line on SPOT Stock
Now trading around the $280 level, SPOT stock is tempting. Especially considering it was worth nearly $365 only a month ago. This is a high-growth stock in a growing market where the company is the dominant player. Just remember there are challenges. Musicians and labels continue to pressure for larger royalties. And the fight with Apple is likely to drag on for many months, with no certain outcome.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
Louis Navellier had an unconventional start, as a grad student who accidentally built a market-beating stock system — with returns rivaling even Warren Buffett. In his latest feat, Louis discovered the “Master Key” to profiting from the biggest tech revolution of this (or any) generation.
