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Spotify (SPOT.N) - Fundamental Investment Case

Research

Publication Date: 07 Jun 2019 - By Robert Prather By Robert Prather
Actionable
Differentiated

Equity Fundamental Accounting Equity USA Global Telecom & Media Technology

Initiation Date:

6/6/19

 

Spotify Technology is the world's largest and most popular music streaming service. It operates across every populated continent, with 217mn total MAUs (monthly average users) divided between 100mn Premium subscribers and 117mn Ad-supported users. 

Please download the full report for details on the Bear Case outlined below. The price of the report includes a one hour call with the analyst 

Qualitative Concerns:

  • Competition is intensifying across its footprint and certain peers have the ability to subsidize their music business at lower margins. SPOT's market share has also declined in recent years.
  • Industry percentage growth may have peaked due to developed markets penetration. Worldwide, 86% of people use on-demand music streaming.
  • Music is different than video - 85% of streams came from the big labels' artists and cannot be as easily replicated as video content creation
  • Smart speaker growth is not favorable to Spotify
  • Podcasts may not be lucrative over the next few years and future profitability potential is unknown
  • India launch has seen fierce competition, with other players lowering market prices in response to where Spotify is not the cheapest
  • We think there is increasing risk for growth to stall versus estimates and guidance, with less runway for growth than some might think, along with recent competitor actions in existing and new markets
  • Labels are not pleased with some of Spotify's actions and don't have pressure to provide margin relief as was the case last time
  • Key departures at the firm and a material weakness linked to royalties

Fundamental Concerns:

  • North America is seeing growth decelerate markedly to the mid-teens
  • ARPU has faced pressure and annualized premium churn remains in the mid-40%'s
  • Gross margins slightly compressed MRQ
  • Valuation has growth continuing at a rapid clip, which we think is at increasing risk to falter

Bottom Line: A growth stock facing pressure to continue its brisk pace despite competition across both developing and developed markets and high penetration of its service offering worldwide.

Spotify

Source: VR Fundamental

Pages: 58

Released: 07 Jun 2019

Unlock for 35 credits

The Author

Robert Prather

Equity Analyst

Industrials, Consumer, Telecom & Media, Technology

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London, United Kingdom

info@reachx.co
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