Even in this best-case growth scenario, the implied value is far below Spotifys current price. For the most part, Spotify does nothing but lose money. Even in the most optimistic of scenarios, Spotify is worth less than its current share price. And since the buyer has to pay something to cover processing fees (which usually works out to around $0.40), how do you determine when theyre simply paying the barest minimum? Even though Spotify is considered a tech stock, its margins are far from its software-as-a-service (SaaS) counterparts. Let's take a look. The ratios here only apply to people who paid at least at the generosity threshold of >=2 cents/pence/etc. Here are three key reasons it happened. Deezer Originals offers users special extended play records, podcasts, and videos. Figure 7: Spotifys Implied 2026 Premium Subscribers vs. Bandcamp stands uniquely positioned against this form of antitrust, and its expertise could inform intellectual property reform, digital distribution legislation, pricing thresholds, ownership, and more as part of a larger strategic position. In this scenario, Spotify grows NOPAT from -$50 million in 2019 to $1 billion in 2026, and the stock is worth just $93/share a 62% downside. Their business has potential to outreach the original assumptions. Fully elucidating the meaning of this graph requires volumes; in an earlier conception of this project, it was the reports main focus. According to Spotify, its long-term incentive awardsare designedto align a portion of its executives compensation to the interests of its shareholders. May 6, 2020 By Tim Ingham Since it launched 12 years ago, Spotify has never posted an annual net profit. I worked as a sell-side analyst and also as a broker. To see how this plays out from an investors perspective, take a look at the share price of Pandora, Spotifys older cousin, over the past five years: And lest anyone think the music industry is going to let up, a new piece of legislation known as the Music Modernization Act just passed the House of Representatives. Spotify has generated negativeeconomic earningsin each of the past four years. Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services. So far as we know, there is currently no trade group advocating in this area. Since the introduction of BCF, artists have begun aligning releases accordingly, and BCF is now not only the day when people buy the most, but when the most music is released. In Q4, Spotify's premium subscribers grew 16% year over year to 180 million from 155 million. Wall Street was not happy with the report, sending shares down over 10% the following trading day. This likely won't happen, but it is wise to understand every risk when investing in a company. It offers a free platform that restricts some features and inserts ads every so often the listener must play. The track was available for a limited time, and the item page is no longer on Bandcamp. Bandcamp should help start it. While ad-supported users will likely never be worth more to Spotify than premium ones, monetization improvement is a welcome development. Spotify pays artists just $0.0032 per stream compared to Apple Music at $0.0056 and Amazon Music Unlimited at $0.012. However, fiduciaries should beware of the risks in owning this stock: Growth of Premium Subscribers Is Slowing. But Spotifys business is built on more than delusion and illegality its also a patently stupid model that disregards the past few decades of behavioral economics research and insists on seeing users as rational actors who simply seek the most goods for the lowest price. I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. SPOT Revenue And Core Earnings. 'GET OUT OF THAT PLACE':Rocker Neil Young has a message for Spotify workers. The artist prices their item at 800, and the buyer pays 1600. Rest of World users are now 26% of overall MAUs, up from just 11% in 2018. FORTUNE is a trademark of Fortune Media IP Limited, registered in the U.S. and other countries. It will not do this because the existence of music beyond basic hormonal modulation does not interest it, and therefore, the existence of musicians does not interest it. For this analysis, I chose The Walt Disney Company (DIS) as a potential acquirer of Spotify given Disneys experience with creating exclusive content, history of acquisitions, and opportunity to bundle Spotifys service with Disney+ and Hulu to create a one-stop streaming platform. Still, I imagine investors are maybe also betting on improving monetization metrics. In my view, Spotify has been a fantastic investment since its IPO because its future growth was mispriced. Nevertheless, as great as the underlying business is, investors shouldn't ignore its asking price. Why is the advertising gross margin so bad? For example, if an item costs 1000 Norwegian kroner and a buyer pays 3000 Norwegian kroner, the ratio is 3. Why do investors pour money into one and not the other? Most of our major. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body. Investors in these companies must know the risk going in. At the same time, beyond Bandcamp Daily the sites in-house music publication and a physical record store in downtown Oakland that most people will never encounter, the company seems to have no marketing, mostly resorting to artists themselves to market the platform for their own work. Just have in mind that Spotify's future growth rate should be slower than before due to its size, which should influence its valuation. I worked on my country's stock exchange as an analyst for private debt prospectus. In fact, the company's cumulative annual net losses in the past decade add up to 2.62 billion - or around $2.8bn at today's exchange rate. Listen on Spotify Send voice message. After adjusting for all liabilities, I can model multiple purchase price scenarios. Well, on that day, Phoebe Bridgers released a cover of the Goo Goo Dolls Iris, of which she sold 43,942 copies for a total of $178,735. Those investors better get used to disappointment. But despite recent anti-monopoly efforts by US legislators many of which will directly affect todays music industry Bandcamps best moves may be beyond North America. In 2020, Spotify made a measly 6 million euros in gross profit from its ad-supported base. Apple offers exclusive album releases from artists such as U2, Drake, Chance the Rapper, Taylor Swift, and Katy Perry to draw users to its service. Figure 8: SPOT Has Large Downside Risk: DCF Valuation Scenario. The industry has a phalanx of lawyers to push their case in court, and is effective at charming Congress with lobbyists and celebrity star power. It's worth recognizing that differences do exist between Spotify, Amazon, Tidal, Apple, SoundCloud (especially), and so on. 11 [deleted] 20 days ago There's no limit on streaming songs though. The precise extent to which activity on Bandcamp correlates with country population wasnt explored. What about that non-BCF on November 13 with just over 100,000 sales? Were halfway done with this report, and hopefully you read to the end. Why are True Ventures and Garlinghouse, who, as the companys only listed investors, most likely sit on Bandcamps board, not pushing for the company to modernize its architecture, aggressively market itself, and demand all manner of things venture investors do to effectively put a gun to CEOs heads and tell them to grow or die? Insider trading information is not available for Spotify. The paper empirically shows that my firms data is superior to Operating Income After Depreciation and Income Before Special Items from Compustat, owned by S&P Global (SPGI). Indeed, this was a very bold call to make back then because the stock traded at only $182.19. Further investment becomes a needless risk that jeopardizes a safe source of income. This is concerning from a valuation perspective. Even if Spotify can grow revenue by 20% compounded annually for five years and achieve a 9% NOPAT margin, the firm is worth less than $242/share. And many middle-class musicians do exactly that. Key points: Spotify has 60m subsribers, twice as many as the next biggest streaming service; No music streaming business is profitable; Record labels are making the money, recording artists are not Theres a $75 trillion reason the economy wont crash into a recession, top economist says: Baby boomers pent-up net CA Notice at Collection and Privacy Notice, Do Not Sell/Share My Personal Information. One of the most notable adjustments was $300 million inasset write-downs. Competes against Apple, which makes sacks of money, so it can give away music at less than cost to promote other products. Back in July 2018, I covered SPOT. Spotify: Still Not Convinced About Its Profitability January 05, 2022 10:45 am EST Written by Nikolaos Sismanis for TipRanks -> Spotify Technology ( SPOT) is the world's biggest music. Consequently, I think it's SPOT's investment proposition doesn't make sense at these levels. See the math behind this reverse DCF scenario. Unfortunately, it seems that the stock's risk-reward proposition looks unfavorable for new investors. Up Almost 100% This Year, Is It Time to Sell Spotify? Which Stock Is A Better Pick For The Next Three Years FedEx Or UNH? [+] (Photo Illustration by Igor Golovniov/SOPA Images/LightRocket via Getty Images). Premium subscribers (or paid users of the service) generated 93% of Spotifys revenue in 2Q20. The only album in this dataset with the Alameda tag is Ska Against Racism, a compilation whose proceeds went to anti-racist organizations. Heres a brief overview of activity on the platform between the beginning of September and the end of December 2020. I wrote this article myself, and it expresses my own opinions. In the course of this research, one of us suggested to someone at a record label that publishes its artists music exclusively on streaming platforms that they should throw a few tracks on Bandcamp and see what happens. In my view, Spotify has delivered on its promise of explosive growth since its IPO. So, its only reasonable to expect that future growth should be slower than before. The point is that it all matters. Engadget noted one positive element in subscriber growth: It was mostly from paying users. To make the world smarter, happier, and richer. For this, we can look at the ongoing secular trends that affect SPOT. The item type matters and the locations of the parties on both sides of the transaction matter. Spotify seems relaxed about failing to make a profit. Given the analysis above, the only plausible justification for SPOT trading at such a high price is the expectation that another firm will buy it. Per Figure 2, consensus estimates for Spotifys revenue growth expect the decline to continue to just 18% YoY revenue growth in 2022. Per Figure 3, Spotifys market share of the global streaming music subscription market fell from 36% in the first half of 2018 to 32% in 1Q20. It posted an operating profit of 94. Ad-supported subscribers grew even quicker at a 19% clip year over year, to 236 million from 199 million. One of the Coalitions members is Spotify, which has for years ironically accused Apple and Google of monopolistic behavior. A little under 3 percent more people pay at or above the generosity threshold on BCF than on normal days, which is maybe significant, but maybe not. But while the magnitude of that generosity is the same for items with price floors, people spend much more on $0-priced items on BCF than they do on all other days. Due to its position in the streaming market, its outsized influence on other participants, and our interest in editorial brevity, Spotify is the only streaming service seriously examined vis vis Bandcamp in this report. This was a 23 million increase from Q2, a record net addition. The chart shows how each usage option contributes to gross margin. We know the company hasnt taken another investment since its 2010 Series A and the lights are still on. I am not receiving compensation for it (other than from Seeking Alpha). At any rate, they do have opportunities for nice growth. True Ventures successful exits include Peloton and Fitbit, which both went public, as well as Ring, which was acquired by Amazon. This would imply that by 2025 SPOT would have $54 billion in sales, at a 4.07% FCF margin. Phoebe Bridgers, an artist who according to Spotify popularity scores is exactly on par with Charli XCX, brought in more than $178,000 from a single limited edition track released exclusively on Bandcamp that raised money for charity. My takes are based on numbers but without completely ignoring the underlying story. Spotify (NYSE:SPOT) is the market leader in music streaming but has not yet turned this into profit. Figure 4: Spotifys Revenue and Core Earnings Since 2016. But, at this stage, they probably want to expand the sales first, then profit, then their originals contents, then other business. Learn More. After all, Americans and Europeans have more disposable income than citizens in Latin American countries. I believe that SPOT can further increase this percentage, but I also think it has its limits. According to the company itself, the revenue could be $100B in 2030. Consequently, the stock has increased dramatically. SUBSCRIBE TO OUR NEWSLETTER:The Daily Money delivers our top personal finance stories to your inbox. BYE-BYE, SPOTIFY:Here's how to delete your account and where to go now, Find out why Spotify Technology is one of the 10 best stocks to buy now:Our award-winning analyst team has spent more than a decade beating the market. Overview Back in July 2018, I covered SPOT. You see, Spotify guided a revenue CAGR range of 20% to 37%. Nothing is stopping artists from pumping out 100s of songs. The benefits/costs also cut both ways: As Andrew Wilkinson convincingly argued, even Joe Rogan probably could have made more money by turning down Spotifys deal and directly monetizing his listeners. This report was originally published on Components. To report a factual error in this article. Where does this leave us? Whats important is that the many synapses of identity and a sense of being fire in different ways, and a shared nationality casts a net wide enough to capture many of them at the same time all of this in spite of Bandcamp being a platform that otherwise facilitates the globalization of music. Please disable your ad-blocker and refresh. The firm has already spent over $700 million to enter the podcast market by purchasing podcast networks such as The Ringer and signing the likes of Joe Rogan, DC Comics, Kim Kardashian, and the Obamas to exclusive podcast deals. At its current market capitalization of $16 billion and with around $12 billion in overall revenue, the stock could trade at a cheap price-to-earnings ratio (P/E) of around 10 based on its current market cap within a few years if net margin reaches 10%. First, the bets investors make that a start-up might eventually 100x have at least in part depended on illegal activity in the markets that go unchallenged by regulators. This album page is also no longer available and the exact charity cant be recalled, so the association with a charity comes from memory (as well as the >9 ratio the particular album has). (Photo Illustration by Igor Golovniov/SOPA Images/LightRocket via Getty Images), The Macroeconomic And Real Estate Situation At Mid-Year: Cue The FOMC Again, Where The Money Is Going In Market Sectors. Every recommendation made here is a facet of a single exhortation: that Bandcamp do everything it can so that no one sends an email like this ever again. Second, more than a decade after Bandcamps 2008 founding, other investors, founders, and sellers have discovered that businesses that do facilitate economic relationships between sellers and customers that let the countless variables interact as they will are in fact cheaper to start and invest in and can become successful much more quickly. Coming back to the article title, yes, I do think Spotify investors should be concerned about the company losing money and the lack of margin expansion. What would happen if none of it went to charity? 10 percent of it? To justify its current price of $242/share, Spotify must: See the math behind this reverse DCF scenario. Spotifys peer group includes other firms that provide subscription-based content services such as Apple, Alphabet, Tencent Holdings Ltd (TCEHY), Netflix, Amazon, and Sirius XM Holdings Inc. (SIRI). Elements of its layout are weirdly counterintuitive. However, 3 times sales is likely too low for this business, as it last reached this level during the height of the pandemic sell-off in March 2020, despite significant business improvement since then. Since then, the risk-reward equation has changed considerably. June 5 Spotify Vice President Sahar Elhabashi announced the company would cut 200 employees2% of its workforceas it moves forward with a . The company has intimated at this future so hard as to almost issue a press release. Apple hasnt disclosed its own paying Apple Music subscribers for more than two years now. But until streaming companies are able to gain the influence of the music industry, they will never make any money. This is a good point. Youre reading 9to5Mac experts who break news about Apple and its surrounding ecosystem, day after day. I wonder what kind of additional verticals SPOT could unlock. New Constructs, LLC. Hence, I deduce that new investors should require an even faster growth rate to justify its current price tag. The company is seeing strong user and subscriber growth. Spotifys currenteconomic book value, or no growth value, is -$13/share. My valuation model indicates that the stock is at least 36% overvalued, even under very generous inputs. Fridays are generally the sites biggest days, which is also when artists are more likely to release albums, although how much more likely is beyond the scope of this study. Deezer is owned by Access Industries which owns Warner Music Group, one of the Big Three music labels. The Motley Fool is a USA TODAY content partner offering financial news, analysis and commentary designed to help people take control of their financial lives. Subscribe to Well Adjusted, our newsletter full of simple strategies to work smarter and live better, from the Fortune Well team. Perhaps all of this is overstating the existence of competition between the two ecosystems; in many ways, they can be seen as complementary, as streaming provides an avenue for music discovery and Bandcamp an avenue for economic relationships Diamond once compared Spotify to the radio, a place to find new artists. This year, it increased its gross profit by 1,850% to 117 million euros.