Spotify Technology SA (NYSE: SPOT) is a Swedish audio streaming and media services provider. Shares of the company have gained around 100% over the past 12 months. According to a bullish investment thesis by Investing Canon, SPOT would be “one of the most compelling growth stories of this decade.” Continued geographic expansion and increased market penetration would help Spotify grow top-line by 2-3x, establish itself as the dominant entertainment platform, expand gross-margins and continue to expand its reach and consumer/artist use-cases, according to the thesis.
Spotify is early in the global consumer adoption lifecycle and hasn’t come close to monetizing the value of its media/entertainment platform. Under the leadership of CEO Daniel Ek, Spotify is on the way to focus on improving the value to its stakeholders. The company is trying to find opportunities to reinvest in the platform. In 2019, Ek made interesting comment while talking about the new opportunities. Here is what he said:
Consumers spend roughly the same amount of time on video as they do on audio. Video is about a trillion dollar market. And the music and radio industry is worth around a hundred billion dollars. I always come back to the same question: Are our eyes really worth 10 times more than our ears? I firmly believe this is not the case.
This opportunity starts with the next phase of growth in audio — podcasting — Daniel Ek (Feb. 2019)
Spotify currently has 17% penetration of its addressable users and the long-term opportunity is 3 billion smartphones – that the company intends to launch into. The company could 2-3x its MAUs in five years, conservatively, according to the thesis.
Advertising is most underappreciated part of the company’s business, representing 10% of the total company revenues. However, it would be “a key driver of the upside opportunity for the company’s financials,” states the thesis.
The opportunity for Spotify, streaming services, and podcasting to take share from terrestrial radio advertising represents a ~$28bn opportunity. Terrestrial radio advertising in the U.S. alone is a ~$13bn market. Between 2014 and 2020, streaming + podcasting’s “share of ear” grew by 11 percentage points from 13% to 24%. Naturally, the advertising dollars have followed. Spotify has invested aggressively in tooling, analytics, and acquisitions (i.e., Megaphone) to further unlock this market.
Spotify could capture 75% of the incremental digital/podcast growth. The company is in the best position to capture advertising dollars.
Given the current growth trajectory, streaming + podcast as % of total audio time should reach ~40% of total U.S. audio time by 2025. As the platform with the largest reach and really only real advertising player with scale, Spotify will capture ~75% of the incremental digital/podcast growth. This translates to ~$2bn of run-rate revenues in the United States. Global radio advertising will follow similar trends and represents an incremental ~$1.2bn. In aggregate, I believe there’s a short-term opportunity of ~$3bn of advertising dollars that Spotify is will capture.
Spotify would be one of the most compelling growth stocks in this decade. It is “one of the most underappreciated internet/consumer growth stories” of this decade. SPOT has “a clear runway to 2-3x its revenue in five years and become a once-in-generation media platform.”
Prominent investors are also considering SPOT as a good stock to buy now. The number of bullish hedge fund bets inched up by 8 recently, with Spotify finding a place within 44 funds’ portfolios at the end of September. However, SPOT isn’t among the 30 most popular stocks among hedge funds.
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Disclosure: None. This article is originally published at Insider Monkey.