SPOT - Spotify

[Liberty]

Good podcast interview with Daniel Ek:

http://investorfieldguide.com/ek/

[chesko182]

 A very interesting take https://venturedesktop.substack.com/p/spotify-the-ambient-media-company

[chesko182]

Q1 out.

"Despite the global uncertainty around COVID-19 in Q1, our business met or exceeded our forecast for all major metrics. For Q2 and the remainder of the year, our outlook for most of our key performance indicators has remained unchanged with the exception of revenue where a slowdown in advertising and significant changes in currency rates are having an impact."

"Q1 2020 was the third consecutive quarter of year on year growth above 30%. In all four of our regions, MAU grew faster in Q1 2020 than it did Q1 2019. Growth in North America accelerated for the 2nd straight quarter led by outperformance in the US, as did growth in our largest region, Europe. Our Latin America and Rest of World regions continue to see the fastest growth, with those segments growing 36% and 65% Y/Y, respectively."

https://s22.q4cdn.com/540910603/files/doc_financials/2020/q1/Shareholder-Letter-Q1-2020-Final.pdf

[chesko182]

Up almost 11% today, and rightfully so. Huge move today with signing Joe Rogan exclusively for Spotify INCLUDING videos...(a first for spotify)

Pretty insane

https://newsroom.spotify.com/2020-05-19/the-joe-rogan-experience-launches-exclusive-partnership-with-spotify/

https://www.theverge.com/2020/5/19/21263927/joe-rogan-spotify-experience-exclusive-content-episodes-youtube

[Liberty]

Sucks for the podcast ecosystem generally, but good for Spot.

Too bad their podcast player kind of sucks. Can't believe the speed settings aren't more granular (goes from 1.5 to 2) and there's no dynamic silence trimming... I also hear it sometimes loses where you are and starts over. Sounds like a RealPlayer(tm) experience... Surprised they haven't been better about that since they obviously are focusing on podcasting a lot.

[oscarazocar]

SPOT should acquire Overcast, which is an incredibly good podcast app and I believe owned by one guy.

[Liberty]

SPOT should acquire Overcast, which is an incredibly good podcast app and I believe owned by one guy.

Marco Arment just said on his last podcast that he got plenty of offers and doesn't intend to sell. Said everybody has a price but that his price is really high..

Also, one of his main things for making Overcast is to keep the podcast ecosystem free and vibrant, so he's not happy about the exclusive games and walled gardens and ad-tracking stuff:

https://twitter.com/marcoarment/status/1262824593494073345?s=20

[chesko182]

"We interviewed the Former CEO of EMI Group, one of the four largest record labels globally and now owned by Sony, on the structural changes in the music industry and Spotify's opportunities."

https://blog.inpractise.com/spotify-vs-record-labels/

[griezeman23]

Anyone have a sense of what SPOT looks like in 10 years?

My conservative guess would be $4 / month per subscriber * 12 months * 25% GMs = $12 in GP per subscriber. I assume $4 / month per subscriber b/c the tilt will become more international.

I think the SS has talked about a TAM of 1bn for music streaming... There were 278mn in 2018. SPOT had ~100mn at YE18. So let's assume 35% market share at maturity. Could be higher as SPOT flywheel begins to turn plus the fact that no. 2, Apple Music, is basically constrained to the iPhone ecosystem. That puts SPOT at 350mn subscribers.

So subscription GPs come out to $4.2bn.

Average revenue per ad-supported user is roughly $5 / year ($0.45 per month). Let's assume we see that grow 50% in 10 years (it grew 30% from $0.34 to $0.45 from 2016 to 2019 and this was pre-podcasts).

Let's assume then that ad-supported users end up at 350mn in 10 years as well (I know that ad-supported is 20% to 30% larger today but I have a tough time conceptualizing how big ad-supported could really be).

Let's assume GMs run at 20% (a bit higher than today which is in the high teens.). That's $7.5 * 350 * 20% = $500mn in GPs.

So we have a business in 10 years at $5bn or so in GPs. IIRC, they think they can run the rest of the business at 10% to 15% of revenues - please correct me. So with a biz @ ~22.5% GMs, this means operating income would be somewhere b/w $2.5bn & $1.5bn.

Let's assume a FB / GOOGL multiple on the ad-supported business of ~12x. Then assume the subscription business is worth closer to 20x - this will depend more on what rates look like in 20 years but I am not betting on what that looks like. Biz is split roughly 85/15 in terms of profits so a multiple in the mid- to high-teens seems right. Let's call it 17x.

17x * $2bn = $34bn business. This is where we are today. Inclusive of dilution then this looks worse. But this would be offset by accumulated cash flows plus the TME position plus current cash. Just trying to get some rough number sdown.

Of course, my numbers can be wrong: both lower or higher. I'd think the P() is skewed towards the upside but of course the market is discounting that today.

Then you also have to account for all the implicit options in the business. How successful will podcasts be? Will they pivot into video? How much can they flex GMs? Will artists go towards more independent labels as supposed by the above inpractise interview? What other new businesses will they add?

You can certainly say the valuation looks frothy on what the business looks like today relative to where it will be in the future. However,  I would think this type of thinking fails to recognize the optionality the business has (which is probably what the market is discounting). Of course, that could be some confirmation bias on my part.

Am I racing out to buy shares today? Certainly not but I would not to be on the other side of the trade right now. I am pretty neutral on shares today at $180ish.

[jfan]

Here is my best guess on intrinsic value:

If 2030 Global Population = 8.59 billion (2020 = 7.7 billion growing at 1.1%),
where 75% of this population is over 15 years old who can purchase a smartphone that in turn has a 75% smartphone penetration (I've ignored other devices given that fact that it would unlikely that you have an alternative device before having a smartphone). Roughly 23% of people listen to audio on their smartphone that may grow to 50% in 10 years (assuming that streaming will take over the 10% that listen to audio on their computer, 4% from CD players, and 30% of the 47% that use a radio receiver).

This would put the total number of potential streamers at 2.4 billion people in 2030 up from my estimate of 983 million people today.

~ 35% of today's audio streamers subscribed to a paid-audio service. Assuming the same percentage in the future, this would put about 852 million global subscribers.

Spotify has 36% of the total number of global subscribers. Assume that in 10 years, they can take 1/3 of the 11% of the current market that is occupied by Pandora, Deezer and others. This would put their market share at ~ 41% or 349 million Premium subscribers.

The current ratio of Ad-supported sub to Premium-sub at Spotify is 1.45. Assuming no change, this would mean that there would be 506 million Ad-supported subs.

The unit value of the Ad-support sub would best framed as revenue per Ad-supported sub daily listening minutes (analogous to unit economics for railways - revenue per ton mile). The revenue can be broken down into music-related advertising and podcast-related advertising. Today, this is $0.33 per ad-supported sub daily minute. Using current podcast advertising rates is $15-30 Cost per 1000, I figure it is possible to earn ~$2 per user daily minute. (* premium subscribers will be exposed to podcast ads as suggested by management) These values could increase with inflation at 2-3%. (in euros)

My estimates of current and future daily minutes streamed are (based on Share of Ear data, Premium sub listen 3x more than Ad-supported sub, Global Music streaming growing from 16% to 45% [from capturing market share from owned music and car radio play], Podcast streaming growing from 4% to 9%):
Today:
Premium sub (music): 58 minutes
Ad-supported sub (music): 19 minutes
Premium sub (podcast): 14 minutes
Ad-supported sub (podast): 5 minutes

2030:
Premium sub (music): 162 minutes
Ad-supported sub (music): 54 minutes
Premium sub (podcast): 32 minutes
Ad-supported sub (podast): 11 minutes

(Today, people listen to ~ 200 minutes of audio per day across all devices)

Assuming that the annual revenue per premium user does not change from its current $49 (euro).

The future total revenue (euros) in 2030 would be:
1) Premium subscription fees = $23 billion
2) Music Ad-supported revenues = $12 billion
3) Podcast Ad-supported revenues = $86 billion

For a total of revenue of $121 billion (euro).
Assuming at that point, they can achieve a 10-15% operating margin if they can achieve a 30-35% gross margin with a significant reduction in marketing expense.
They might deserve a future 1-1.5x Price:Sales multiple.

It seems that Spotify's growth is largely funded by deferred revenues and accrued label royalty payment liabilities. ~ 6% of their own capital needs to be invested for this growth.

Using a 4% share dilution drag, 8-10% discount rate, I estimate that the current value should be somewhere between $210-366 (USD) per share contingent on streaming becoming a prominent daily share of ear, there are no significant unit price erosions in music and podcast advertising revenues from competition, and Spotify maintaining or slightly increasing global subscriber market share.