Investing in Spotify streaming service: listening to music
Spotify Technology is a Swedish music streaming service. The vast majority of investors believe that the specified firm is worthy of attention. Let's see if this is true.
What do they earn?
If we analyze the company's report for the year, the revenue is distributed as follows
- premium subscription - about 88%. Clients pay to get access to all podcasts, music available on the resource. Gross margin is 29% of revenue.
By region, subscribers are divided as follows:
- North America accounts for 29%.
- Europe - 39%.
- Latin America - 21% of users;
- Other countries - about 11%.
Active users by region (per month) were distributed as follows:
- North America (Mexico, USA, Canada, etc.) - 23%.
- Europe - approximately 33%.
- Latin America accounts for 22%.
- The rest of the world - 23%.
An analysis of income by region and country made it possible to obtain the following indicators:
- America - slightly more than 38%.
- United Kingdom - 10%.
- Luxembourg - only 0,06%.
- Other countries - 51%.
What speaks in favor of the company?
Many consider the sphere of streaming to be the most effective. It is known that the Spotify application is in the top 10 most downloaded worldwide. We can say that her audience reach is really impressive. She scored 422 million users. Paid subscribers at the same time - 182 million.
The company is making efforts to develop the promising podcast segment. Since the threat of a pandemic still remains at present, some users may move into this area, since no breakthrough should be expected from movie producers yet. The audiosphere makes it possible not to limit your imagination, and it does not require huge expenses.
Streaming gave the music business a second chance. It is hoped that the Spotify platform will be able to become the property of some large holding, or it may have an offer to become someone's partner.
They can buy a company, since its final margin is only -5% of profit, and P / S is about 2. The indicators are not so deplorable that buyers are not interested in it. They can analyze and understand that the purchase of such a company may well “shoot” in the future. So the platform has a chance.
Arguments against
Expenses, their rationale. Spotify, like any music platform, has to spend a hefty amount of money to keep its podcasts and music library in good condition to appeal to consumers. Otherwise, it simply will not cope with the competition.
However, the high cost of a catalog of certain artists does not always ultimately correspond to the number of its plays. That is, the risk of wasting funds remains.
Investing in podcasts may pay off in the long run, but so far it hasn't. At the same time, the company is not able to maintain the initially set rapid growth rates. This fact will have a negative impact on its quotes.
Risks.
- Rise in the cost of loans, higher rates make it difficult to service the debts of unprofitable companies. Investors are usually in no hurry to invest in shares of such start-up companies.
- The big risk for Spotify is competition, as big firms like Apple, Google, and Amazon may adopt more aggressive strategies to increase listeners. Another significant risk comes from royalty payments to major record labels. These labels may be entitled to raise Spotify's song royalties, especially if Spotify starts to become too influential or popular. Also, while Spotify can directly negotiate distribution deals with artists, doing so could put the firm at an even greater disadvantage when negotiating with labels. Another risk could come from any potential downturn in online advertising that could affect revenue growth.
- As we have seen historically, the entire music industry faces the risk of disruptive distribution technologies such as the transition from cassette tapes to CDs and, more importantly, the technological innovations in the late 1990s for music downloads and file sharing that led to unrestrained spread of music. piracy has destroyed many well-established music business models.
- With respect to ESG, the risks associated with data privacy and security, and possibly misuse, should be considered. Spotify uses listener behavior data to select songs or albums and create playlists to improve user experience. The firm also uses this data to improve the effectiveness of ads placed between songs or within and between podcast programs. Restricting data usage could reduce the effectiveness of Spotify's advertising, which could lead to lower ad prices or cause hesitation among advertisers purchasing the firm's advertising inventory, which could negatively impact Spotify's revenue and profit growth.
What do rating agencies think?
Analyst agency Morningstar gives Spotify a solid 4 stars out of a possible 5 at current price levels. This cannot but please a potential investor. The fair price was raised as high as $195 a piece when the last closing price was at $111.
Analytical portal simplywall generally set a fair price at $348. Not weak!
What does technical analysis tell us?
Understand the general trend decline Against the backdrop of a difficult economic situation, a similar schedule can be found in other representatives of the stock market. I believe that at the support level of 90, the price should go down there and this may be a more attractive entry level.