Author Topic: SPOT - Spotify  (Read 15604 times)

Liberty

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chesko182

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Re: SPOT - Spotify
« Reply #51 on: August 06, 2019, 03:43:34 AM »
this is problably good for the industry as it may generate more cooperation between the labels and streaming platforms (Tencent owns 58% of Tencent music, which in turn did an equity swap with SPOT where they each own ~10% of each other) There's a lot of headlines around labels seeing distributors as their enemies but I don't think that's actually the case.

It may bring more discipline to the industry and I think it makes sense for them to do this.

https://www.wsj.com/articles/tencent-in-talks-to-buy-stake-in-universal-music-group-11565078272?mod=hp_lead_pos5
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ALLY, JPM, UHAL, BRK, GM, FCAU, AER, LBRDA, SEMUF, SPOT, ERJ

Spekulatius

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Re: SPOT - Spotify
« Reply #52 on: September 19, 2019, 06:33:19 PM »
I looked at Aswath Damodaran's SPOT valuation sheet from last year and decided to update it using this years numbers. One of the issues is that the growth extends further into the future, so I decided to reduce the growth rate from Y1-Y5 a bit from 25% into 22% (to account for the year that passed). FWIW, SPOT has grown >30% during the last 12 month.

Surprisingly, I got a valuation that exceed the current market cap quite a bit - the value/share I got was $185 vs a current share price of $125. A few words of caution - I don't get how Aswath came up with a 21% gross margin last year, I put in a 25% gross margins for the premium subscriber part, which is actually lower than what SPOT achieved in Q2 2019 (26%).

Most of the value is driven by the value of new subscribers that have yet to be acquired. I just took those from Aswath's model, minus my adjustment for the Y1-Y5 growth rate. The result is somewhat surprising, but maybe it isn't and just takes into account the 30% growth from last year, while the shares haven't moved. it seems that there might be a good value to be had. I also played with some numbers and found the valuation to cover the share prices as long as they can get a 13% growth rates for the next 5 years.


I will attach the spreadsheet for those that are interested.
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griezeman23

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Re: SPOT - Spotify
« Reply #53 on: September 24, 2019, 08:36:20 AM »
Has anyone read the WFC report yet? My impression was that WFC is constrained by the 12m PT that they must give (and admit so multiple times). I also believe that their argument for ST nearer GMs to not improve materially is fair but that they discount too much that the labels will go nuclear - 25% of the labels revenues are now from Spotify (according to WFC). It is hard to imagine they'd go nuclear on that. Anyways, as long as management can keep the labels on the proverbial "hook", then it should allow Spotify to continue to focus on customer acquisition and growth in the ST and further entrench SPOT as the audio platform. If one believes in audio streaming (and Spotify by extension), then once at appropriate scale, one would hope for a hockey stick inflection in earnings as management renegotiates contracts with the labels and podcast producers.

My initial thesis is that this point is not too far off into the future (less than five years) but I have not finished my research yet.

Spek: any idea where Damodaran got his churn numbers??? I am seeing churn closer to 4%/month rather than 5% for the year... If so, that drastically changes the picture on the current valuation using Damodaran's DCF.

Spekulatius

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Re: SPOT - Spotify
« Reply #54 on: September 24, 2019, 11:23:11 AM »
I checked the churn numbers and you are correct - the updated monthly churn should be ~ 4.5%, which translated into 42.5% yearly. So here goes the thesis, because the customer value isomer $16 rather than over $100.
FWIW, got stopped out of SPOT at $117. I rarely do stop losses, but for those growth/ momentum stock I do as when they’re moving against you, they really can move a lot. And then, the thesis is broken ( sort ) of anyways now.

Working on updating  Aswaths spreadsheet for Amazon from last year as well and found some smaller issues.

The churn issue with SPOT is huge, so perhaps you should let Aswath know?
« Last Edit: September 30, 2019, 05:28:46 PM by Spekulatius »
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griezeman23

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Re: SPOT - Spotify
« Reply #55 on: September 24, 2019, 11:41:44 AM »
I think the difficulty with the churn number is: is this all premium subscribers? I.e. does the 4% monthly number include non-payers who are on-trial, or is the number purely on premium subscribers? Furthermore, the company does state that 40% of its premium subscribers who churn, rejoin within 3 months, 45% within 6 months and 50% within 12 months. So is 4% to 5% monthly churn the right number? I am not sure and hope someone in the community has some more insight than I do. 

I think the stop/loss for growth companies is an interesting way to play these names, as it does prevent too many losses on the downside (can be massive) for a long, long story. However, how/when do you decide to buy back in?

Spekulatius

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Re: SPOT - Spotify
« Reply #56 on: September 24, 2019, 04:16:08 PM »
I instituted the stop loss because I had little confidence in the valuation to begin with.  I usually don’t use stop losses. In terms of how to use them, I would think that on would generally look at the price momentum and get back in when the selling subsides.

The bigger question however in this case is that I don’t have a reason to get back into SPOT , because the thesis is broken.

I do agree that looking at the churn in a more granular would give more insights, but short of having these numbers, we need to use what we have and based in that it doesn’t seem like SPOT is a value right now, not even close.

FWIW, I think most of the churn comes from users signing up for a promotion and then cancelling when SPOT  goes to full price after the first 3 month or so.
« Last Edit: September 24, 2019, 07:00:27 PM by Spekulatius »
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griezeman23

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Re: SPOT - Spotify
« Reply #57 on: September 25, 2019, 06:37:48 AM »
Spek,

I'd agree with you on the churn with regards to free subscribers.

Why do you say the thesis is "broken"? Sure, in the short-term it is (no leverage with contracts with Big 3) but I'd think SPOT's SG&A is getting to scale given the last three quarters (TTM R&D expense grew 13% y/y down). I think it also shows discipline from management and a confirmation that 2019 contracts will not be renewed at more favorable rates like 2017.

It seems like the main point of contention is whether or not SPOT will be able to pressure the labels enough to reduce their take rate. Was 2017 a blip b/c of the impending IPO so Warner and Sony could sell their stakes? Likely but I still think it's hard to argue that labels take rates (in the LT) will remain at 70 cents on the dollar.

« Last Edit: September 27, 2019, 01:27:54 PM by griezeman23 »

spartan

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Re: SPOT - Spotify
« Reply #58 on: October 01, 2019, 06:12:58 AM »
I've been thinking about Spotify almost to the point of insanity for the past week and can't get around their gross margin problem. Ben Thompson wrote about it a while ago: https://stratechery.com/2018/lessons-from-spotify/

Spotify has a lot going for itself:
1) Product is way better than anything out there (I'm a music guy..all of my millenial friends use it too)
2) User switching costs are high (they have pricing power, as evidenced by their price increases in Scandinavia)
3) There's a lot of room for growth (steady increase in user base and pricing, product tinkering will lead to better customer experience, etc.)

I can't get to a point where I see them holding more bargaining power than the major record labels.

Initially, I thought that artists would want to emancipate themselves from the labels (which would lead to bargaining power erosion and supplier fragmentation). But they don't.

Even worse, Spotify removed the 'direct upload' option for artists. Why? Probably to satisfy the demands of labels before the latest negotiating round. At this stage, it is almost impossible to go around the record labels. They still hold all the cards because they own the music..

One could argue that none of this matters. Labels and streaming services are symbiotic, label management are too dependent on cash coming from streaming services and suffer from institutional problems (if I'm a record label manager, I want to make my bonus and avoid getting fired). But labels still hold all of the cards. They own the music. Spotify will never break free from them.

The only bull case I see is this: steroid-induced revenue gains with steady gross margins (25%) while maintaining sane operating expenses. This can still lead to very healthy profits. But again, in my opinion, the labels will not tolerate that and can squeeze them. They sold off their equity stakes in the company, so interests are not aligned.

And who's to say that Spotify can be trusted with the serious task of capital allocation? Will they be kind to shareholders? Time will tell.

It is entirely possible that I am entirely wrong. Spotify can pull this off. (And I hope they do...record labels have caused a lot of pain to artists.)

But then I'm reminded of the following Buffett quote: "I don't try to jump over 7-foot hurdles: I look for 1-foot hurdles that I can step over."

griezeman23

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Re: SPOT - Spotify
« Reply #59 on: October 01, 2019, 06:59:45 AM »
Great points spartan. I have done much of the same.

I think Spotify is not an easy long call to make; the two main points of the bear thesis: label power and big tech competition are relatively hard to argue against.

Label power: I have a hard time, however, seeing either Spotify or the labels really exacting power over each other. If Spotify maintains its market leadership (Apple Music can't really expand beyond the iOS ecosystem and YouTube Music & Amazon Music both have user bases 10% the size of Spotify's; you also mention the stickiness of the product), then its hard to see the labels squeezing Spotify more. Vice versa, I also have a hard time believing that Spotify will squeeze the labels much, because their business is distribution! Thus, I'd pushback on your GMs get squeezed comment (plus they are moving into podcasts which should theoretically begin to help in the 3 to 5 year range).

What I have been struggling with is what does Spotify look like in 10 years? Let's assume podcasts fail to change the margin profile, we stay at a constant 25% GM and that they have an 90/10 split b/w premium and ads. JPM estimated that SPOT could have 1bn premium users based on further geo expansion by 2023 (I think this is aggressive as it implies a CAGR of close to 30% for the next five years, extending this out to 10 years leaves it closer to 15% CAGR; more reasonable given that the marginal user is now coming more often from EM not DM). At an ARPU of $4/month, this yields $48bn in premium revenues. Using our previous split, that would yield $5bn in ad-supported revenues. At 25% GMs and 5% to 10% net margin, this would yield $2.5bn at the low end and $5bn at the high end. Discounting back to today, that gets us $1bn to $2bn in current peak earnings. Thus, SPOT trades at 10x to 20x peak earnings, today. Thus, the market assuming that Spotify reaches this scale with 50%+ probability . 

Ultimately, this analysis is flawed, as it is simple and does not take into the account the impact of podcasts. If one does believe that SPOT can get to 35% GMs, then net margins could go closer to 15%, which would yield SPOT trading at closer to 6x peak earnings (a more interesting proposition, as the likelihood of success is now closer to 30%). Again, we need stellar management (I think Ek and McCarthy are) and belief in the company strategy.

Just some more thoughts and FWIW I think the Buffet quote is apt here.