Is it Wise to Invest in Spotify (SPOT)?

Rowan Street Capital LLC, an investment management firm, published its fourth-quarter 2021 investor letter – a copy of which can be seen here. In its letter, the fund said that the recent quarter was particularly tough in terms of market performance for most digital economy stocks and for its focused strategy, where its portfolio declined -12.3%. This resulted in a -19.4% (gross) decline for the full year 2021. Spare some time to check the fund’s top 5 holdings to have a clue about their top bets for 2022.

Rowan Street Capital, in its Q4 2021 investor letter, mentioned Spotify Technology S.A. (NYSE: SPOT) and discussed its stance on the firm. Spotify Technology S.A. is a Stockholm, Sweden-based music streaming company with a $37.4 billion market capitalization. SPOT delivered a -16.45% return since the beginning of the year, while its 12-month returns are down

Here is what Rowan Street Capital has to say about Spotify Technology S.A. in its Q4 2021 investor letter:

Spotify (3 year business performance)

Monthly active users (MAU) grew by 95% since 2018 or 25% per annum.

Revenues grew 82% or 22% per annum — a very respectable growth rate.

Spotify has quickly become a number one podcasting platform with 3.2 million podcasts (growth rate of over 1500%) and, as data indicates, the top platform for podcast consumption in 60+ countries. They have also recently become the number one podcast platform the U.S. listeners use the most, and given that the U.S. represents the largest podcast market globally, we think this is quite significant.

“Audio is our right to win and while we’ve been relentless in our pursuit of being the world’s largest audio platform, it is still early days and we’re just getting started. The industry is only just starting to grasp the magnitude of this opportunity as we continue to remain focused on unleashing new experiences that demonstrate the future we envisioned for audio.” — Daniel Ek, Spotify CEO

SPOT stock is up ~94%, which accurately reflects the business fundamentals.

From the valuation risk perspective, the price-to-sales multiple remains very undemanding at 3.89x.

Given the pace of growth and innovation at Spotify, we believe its not unrealistic to expect that they could surpass one billion in monthly active users by 2025, which implies a 25% annual compound growth rate. Their revenues could expand in a similar fashion and their gross margins could expand as well given the dramatic growth of their ad-supported business, driven by podcasts. Thus, we expect Spotify stock to double over the next 3-5 years as it reflects the fundamentals of the underlying business.”

Photo by Norbert Buduczki on Unsplash

Our calculations show that Spotify Technology S.A. (NYSE: SPOT) failed to obtain a mark on our list of the 30 Most Popular Stocks Among Hedge Funds. SPOT was in 48 hedge fund portfolios at the end of the third quarter of 2021. Spotify Technology S.A. (NYSE: SPOT) delivered a -24.18%% return in the past 3 months.

Earlier this year, we also shared another hedge fund’s views on SPOT in another article. You can find other letters from hedge funds and prominent investors on our hedge fund investor letters 2021 Q4 page.

Disclosure: None. This article is originally published at Insider Monkey.