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Local Broker Long On Spotify…Really?

Hamish Corlett from TDM is long on Spotify as a stock for the future, he’s even claiming that the audio Companies market-leading position will catapult the business to be among the so-called FAANG stocks alongside the likes of Apple and Amazon.

I don’t know how much this guy knows about the audio market, but Spotify is never going to be an Apple or Amazon stock ever.

Even though Spotify’s business has continued to chug along, alongside the likes of Apple Music, the stock hasn’t performed well this year. Its price is down 23.8% year to date while the broad market S&P 500 index is up 16%.

Even as a long term buy Spotify is going to have to compete up against some big brands such as Apple who actually understand marketing.

Corlett’s claims that Spotify has become more attractive given its pole position in the audio market and he sees it as an attractive valuation that sits at just half of Netflix.

Music is being sold via subscription by Google/YouTube, Apple, Tidal and Amazon organisations that have access to vast numbers of consumers.

Spotify on the other hand has to trade cap in hand for subscribers, free trials, associations with mobile phone brands or of late TV companies who are putting Spotify alongside content apps on their TV’s.

At the end of the second quarter 2021, Spotify had 365 million MAUs and 165 million subscribers to its premium ad-free music service.

The company continues to ride the global transition from analogue music listening (i.e. radio) to streaming and on-demand listening, and it has set a goal of hitting 1 billion users.

Given that there will be an estimated 7 billion smartphone users worldwide by 2030, the vast majority of will want to access music from their devices. We already know that the bulk of Apple iPhone users prefer Apple Music over Spotify and this is a major problem for Spotify.

Spotify has 32% of the music streaming market and several analysts claim that could actually lose share as Apple looks to grow revenues from music Vs app downloads due to recent legal issues.
Spotify actually lost market share in the early part of this year to fast-growing competitors YouTube Music and Amazon Music.

Some claim that a slight decrease in market share will not be detrimental to Spotify’s prospects.

Corlett has told the AFR ” “We’ve chosen to double down on this idea,” he said, driven by “our belief that Spotify will become one of the leading internet businesses of our generation”.

When the likes of Meta, Amazon, Apple, Netflix or Alphabet reached $US50 billion in market value, consensus forecasts always lagged the eventual performance over the next five years. Corlett said that dynamic was happening now with Spotify.

“The key insight is that the market can still underestimate the duration of growth and margin expansion in these situations,” he said.

“We believe that Spotify has all of these characteristics and, similar to the FAANG companies at the same point of time, the market is forecasting decelerating revenue growth for Spotify and next to no gross margin expansion.”

Corlett pointed to Spotify’s concentrated position in the audio market, which has included a big push into podcasting and the formation of an open platform that will tighten links with creators and listeners.

“This is a dynamic we think will contribute to the consolidation of Spotify’s audio opportunity to a winner-takes-most market,” he said. “Spotify is investing in the future of audio, and we think they’re just getting started.”

My view is that the real upside for Spotify is if someone like Amazon or Google buy them out.



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