Spotify Is Looking Better Than Ever

Seeking Alpha2021-11-04

Summary Paid subscriber growth is back on track. Podcasts shift part of the business from a variable cost structure to a fixed cost structure. Ad revenue is up 75% year-over-year! Avid Photographer....

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精彩评论

Yannick
2021-11-04
Yannick
Like pls
LPN
2021-11-04
LPN
Thanks
vxf
2021-11-04
vxf
Stay invested
JoHo
2021-11-04
JoHo
Please like and comment. Thanks.
- HHTan:
  Thanks
- JoHo:
  Thanks!
- ZEROHERO:
  Done

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Travel the world to capture moments and beautiful photos. Sony Alpha User/iStock Editorial via Getty Images\nIntroduction\nMy thesis is that the future is bright for Spotify (SPOT) as paid subscribers, gross margins and ad revenue continue with prodigious growth. CEO Daniel Ek and the rest of Spotify have ardor to be a huge part of audio as the world keeps moving towards streaming and podcasts.\nIn the 3Q21 earnings call, CEO Ek talked about Spotify’s opportunities as the world shifts away from terrestrial radio:\n\n A good reminder,\n Linear Radio still has a 46% share of audio listening in the U.S. alone, this despite consumption shifting steadily away from it. In this year,\n more than 60% of all audio ads spending will go to traditional radio. I think this clearly shows that we have plenty of room to grow both in listening time and in our effective monetization.\n\nAt the time of this writing the exchange rate is about $1.16 per €1.\nPaid Subscribers Keep Rising\nIt’s a no-brainer for new subscribers to continue signing up as streaming music is one of the cheapest forms of entertainment available per the June 2021 Music is Universal presentation by Pershing Square:\nImage Source: June 2021 Music is Universal presentation by Pershing Square\nSize begets size as new streaming customers like to go with the market leader. There is no one close to Spotify in terms of paid subscribers in the audio landscape. Apple (AAPL) might be a distant number two; they are well behind and they stopped disclosing their numbers some time ago. Also, Apple’s worldwide smartphone penetration isn’t nearly as high as their U.S. level.\nYears ago Barry McCarthy was the CFO at Netflix (NFLX) and he learned the importance of being the earlier leader in the race to acquire paid subscribers. He left Netflix with the right structure and took that knowledge to Spotify where he served as CFO, laying down a solid foundation before handing the reins to current CFO, Paul Vogel. Spotify is catching up with Netflix with respect to paid subscribers but both companies are still growing nicely which is partially due to the contributions made by former CFO McCarthy. Back in 2015, Spotify only had 37% as many subscribers as Netflix but through 3Q21 they were up to 81%. I put together a chart to help visualize the growth for both companies:\nImage Source: Author’s spreadsheet\nThe Gross Margin Keeps Improving\nPer the 3Q21 financial statements, Spotify’s 3Q21 gross margin was 26.7% which is a nice improvement from the 3Q20 gross margin of 24.8% below:\nImage Source: 3Q21 financial statements\nThe 3Q21 press release talks about this improvement:\n\n Gross Margin finished at 26.7% in Q3, above the top end of our guidance range and reflecting nearly 200 bps of Y/Y expansion. The Gross Margin improvement reflected a favorable revenue mix shift towards podcasts, marketplace activity, improved music advertising operating leverage, and Other Cost of Revenue efficiencies (e.g. payment fees, streaming delivery costs), which were partially offset by higher non-music and other content costs and publishing rate increases. Premium Gross Margin was 29.1% in Q3, up 182 bps Y/Y, and Ad-Supported Gross Margin was 10.5% in Q3, up 993 bps Y/Y. As a reminder, all content costs related to podcast investment are included in the Ad-Supported business for the current and historical periods.\n\nThese days Netflix enjoys a gross margin north of 40% but it was down at 27.2% [$983.4 million/$3,609.3 million] for 2012 per the 10-K from that year. Per the Spotify 3Q21 financial statements, their 9M21 gross margin is 26.9% [€1,879 million/€ 6,979 million] so they’re almost up to the 2012 level at Netflix. Spotify has come a long way from their gross margin of 11.6% for 2015 in their S-1 filing and they aim to keep going up to a level of 30% to 40%. CFO Paul Vogel answered a question about getting to the 40% level at the September 2021 Bank of America Conference. He noted that podcasts are a drag on gross margins right now but said that will flip as the business matures and they have more of a fixed cost structure than a variable cost structure:\n\n One is, we think advertising is going to continue to grow, continue to be a bigger part of our business. Right now, it’s 10% of our business. We think there’s opportunity to improve the ad margins on the music side alone, because right now they’re lower than their premium side. We think there’s an opportunity there. And then you delve into the podcasting side where, as you said,\n as more and more of our business can move over to a fixed cost nature versus variable costs nature, we think there’s a big opportunity to grow gross margin, on top of the podcasting business, and we sort of modeled that over a long period of time. And even though \n right now, the podcast business is actually a drag on gross margins. We think over time, that will flip and will be a benefit to gross margins, if not a significant benefit to the gross margin.\n\nAd Dollars Are Increasing\nQuarterly ad revenue grew 75% year-over-year:\nImage Source: 3Q21 financial statements\nPodcasts are a key part of ad revenue and the progress in this area was illustrated in the 3Q21 earnings call:\n\n We started our journey \n 3 years ago in podcasting with a catalog of about 185,000 podcasts. And we were really nowhere compared to the largest players in the industry.\n Today, we have 3.2 million podcastson the platform, a growth rate of over 1,500%. But despite the fact that we're still a relatively new entrant, previous data indicated we have become the top platform for podcast consumption, in 60-plus countries. And now, according to Edison research and our own internal sources, we recently became \n the number one podcast platform U.S. listeners use the most.\n\nIn the 3Q21 earnings call, it was noted that advertising revenues as a percentage of total revenues hit 13%. A question was asked by Rich Greenfield about the mix of revenues in five years and that mix shift impacting margins. CEO Daniel Ek answered by saying advertising should eventually be at least 20% of revenues and maybe even more than 40% of revenues in 5 to 10 years:\n\n Maybe I'll talk about the size of this and Paul can chime in on the impact on margins. I'm really excited about ads. I think we have had a tremendous quarter with 75% growth year-over-year.\n But this is just the beginning, as I stated in my opening remarks. Long term, I believe at the very least, this should be 20% of our revenues. But it might possibly be a lot more than that 30%, 40% even over the next 5 to 10 years.We're very excited about this being the second big revenue driver for Spotify and are obviously investing behind that both in product and platform improvements, but also as you may have read in hiring staff across the world that helps service these advertisers.\n\nCFO Vogel chimed in on the mix of revenues question with some answers as well, noting that margins were up almost 1,000 basis points on the ad side:\n\n And then from advertising generals, as Daniel said, it was up 75% in the quarter. We saw really nice, healthy gains on the music side. It was up significantly on the advertising side. And then podcasts advertising growth was in the triple digits. So we're seeing it across the board. What's really interesting is that the increased inventory is bringing increased demand. The demand is really high across all of our products. Podcasting is helping significantly on that. And then from a margin standpoint, obviously, the podcasting margin is helpful over time. We think having a fixed cost nature of the podcasting business and being able to grow that advertising will help margins. But additionally, just bringing more advertising into the platform, we're seeing the free music margins move up as well as you guys are aware, our free music margins are below our premium music margin. So to the extent that we can drive incremental advertising across not just podcasting, but music in general, that will help margins as well.\n\nValuation\nIn my March article, I thought Spotify was worth about $55 billion. Some of the numbers coming in since that time have been even better than expected. Also, management has increased the bottom end of the range for 4Q21 total revenue and gross margin. I now think Spotify is worth close to $60 billion. Today’s market cap is $58 billion based on the November 2nd share price of $298.08 and the 194,614,910 share count as of September 30, 2021 in the 2Q21 6-K filing. The enterprise value is fairly close to the market cap and I believe the stock is reasonably priced for the long run.","kind":null,"is_publish_news":true,"is_publish_highlight":true,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[{"id":848721130,"gmtCreate":1636031419010,"gmtModify":1636031525193,"author":{"id":"3575024004895861","authorId":"3575024004895861","name":"Yannick","avatar":"https://static.tigerbbs.com/b8bcd137597d0a92ada6ef564b84dd48","vip":1,"crmLevel":2,"crmLevelSwitch":0},"htmlText":"Like pls","listText":"Like pls","text":"Like pls","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":2,"commentSize":0,"repostSize":0,"link":"https://laohu8.com/post/848721130","repostId":1191996183,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"CN"},{"id":848762850,"gmtCreate":1636030836434,"gmtModify":1636031195401,"author":{"id":"3578563881684908","authorId":"3578563881684908","name":"LPN","avatar":"https://static.tigerbbs.com/63e3cb5f66016a665aadbe18eaadb09b","vip":1,"crmLevel":1,"crmLevelSwitch":0},"htmlText":"&nbsp;Thanks","listText":"&nbsp;Thanks","text":"Thanks","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":1,"commentSize":0,"repostSize":0,"link":"https://laohu8.com/post/848762850","repostId":1191996183,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"CN"},{"id":848787787,"gmtCreate":1636030183866,"gmtModify":1636030234686,"author":{"id":"3582839637303229","authorId":"3582839637303229","name":"vxf","avatar":"https://static.tigerbbs.com/b1ee9a28e0a19bf5b87d52e90dc87788","vip":1,"crmLevel":2,"crmLevelSwitch":0},"htmlText":"Stay invested","listText":"Stay invested","text":"Stay invested","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":2,"commentSize":0,"repostSize":0,"link":"https://laohu8.com/post/848787787","repostId":1191996183,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"CN"},{"id":848782355,"gmtCreate":1636029844080,"gmtModify":1636029844284,"author":{"id":"3571654919705737","authorId":"3571654919705737","name":"JoHo","avatar":"https://static.tigerbbs.com/f6abe4a1fabaa50223737e93c50ec182","vip":1,"crmLevel":4,"crmLevelSwitch":0},"htmlText":"Please like and comment. Thanks.","listText":"Please like and comment. Thanks.","text":"Please like and comment. Thanks.","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":3,"commentSize":3,"repostSize":0,"link":"https://laohu8.com/post/848782355","repostId":1191996183,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"comments":[{"id":6454198,"gmtCreate":1636036049834,"gmtModify":1636036049932,"authorId":3582782817523238,"author":{"id":3582782817523238,"authorId":3582782817523238,"name":"HHTan","avatar":"https://static.tigerbbs.com/c8134085c63f43886300c1e18d3ab40c","vip":1,"crmLevel":5,"crmLevelSwitch":0,"individualDisplayBadges":[]},"repliedAuthorId":0,"objectId":848782355,"type":1,"supId":0,"prevId":0,"content":"Thanks","text":"Thanks","html":"Thanks"},{"id":6452935,"gmtCreate":1636029908405,"gmtModify":1636029908434,"authorId":3571654919705737,"author":{"id":3571654919705737,"authorId":3571654919705737,"name":"JoHo","avatar":"https://static.tigerbbs.com/f6abe4a1fabaa50223737e93c50ec182","vip":1,"crmLevel":4,"crmLevelSwitch":0,"individualDisplayBadges":[]},"repliedAuthorId":0,"objectId":848782355,"type":1,"supId":0,"prevId":0,"content":"Thanks!","text":"Thanks!","html":"Thanks!"},{"id":6452926,"gmtCreate":1636029851637,"gmtModify":1636029851737,"authorId":3566532164444643,"author":{"id":3566532164444643,"authorId":3566532164444643,"name":"ZEROHERO","avatar":"https://static.tigerbbs.com/62813b6df1c4722e559d112fadd5486a","vip":2,"crmLevel":8,"crmLevelSwitch":0,"individualDisplayBadges":[]},"repliedAuthorId":0,"objectId":848782355,"type":1,"supId":0,"prevId":0,"content":"Done","text":"Done","html":"Done"}],"langContent":"CN"}],"isCommentEnd":false,"newsSizeData":{"likeSize":26,"commentSize":4,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":false,"deviceId":"web-server-community-laohu8-v3","version":"4.26.2","shortVersion":"4.26.2","platform":"web","vendor":"web","appName":"laohu8","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/1191996183"}