The audio streaming king
Spotify shares have been on a massive tear since they bottomed around $118 per share in March during the initial COVID-19 panic. Since then, they have soared 97% to $231 per share as of this writing.
Some of that has been due to a solid first-quarter earnings report that showed continued strong growth and minimal disruption from the effects of COVID-19. But the big news lately that sent the stock up 19% in May was the signing of Joe Rogan to a multiyear exclusive podcast deal. And more recently, the stock has surged higher due to the signing of Kim Kardashian and the DC Comics universe to exclusive podcast deals as well.
These deals are so important, because they will attract even more users to Spotify's platform. And the more users Spotify has in the future, the more its scale and market power should ensure strong future profitability. Why? First, a larger number of users should naturally maximize the number of Premium subscribers. Not only will that boost revenue and profit, but the larger Spotify becomes, the more critical it becomes to the major music labels. And that should incrementally improve its bargaining power when it comes time to renegotiating music royalty rates.
Second, the more users Spotify has, the more ad impressions it will sell on Spotify-owned podcast content. That should generate high-margin advertising revenue and should create the "Netflix-like" operating leverage that's been elusive for Spotify with its core music streaming business thus far.
Finally, greater scale will help the company leverage its corporate overhead expenses, including selling and marketing, general and administrative, and research and development expenses. As revenues rise, these expenses won't have to rise as much, which should contribute to greater profitability.
An online retailer of used cars
Carvana is a rapidly growing online retailer of used cars in the U.S. After launching in its first market, Atlanta, in 2013, the company has quickly exploded to become the third-largest used car retailer in the country with 177,549 retail used cars sold last year. But the company is still just getting started for two key reasons.
First, Carvana has developed a fundamentally better economic model for selling used cars. Its online model allows it to grow without the limitation of having to build expensive brick-and-mortar dealerships. At the same time, its nationwide inventory pool allows its customers to browse over 20,000 cars at once -- a far larger selection than is available at any single physical dealership, which typically carries no more than a few hundred cars. Additionally, Carvana's nationwide logistics and delivery network allows the company to deliver any one of these cars to customers' driveways across the country.
Not only should this used car model scale much better over time than the physical dealership model, customers appreciate it much more. Shopping for a used car is a notoriously unpleasant customer experience, but Carvana's selling experience has earned it a Net Promoter Score ("NPS") of 82 as of last year. For context, an NPS score above 0 is considered "good," above 50 "excellent," and above 70 "world class."
Second, the used car market is so fragmented that the No. 1 player, CarMax, has only about 2% national market share. The top 100 players have less than 9% market share combined. This wide fragmentation is due to the fact that it's extremely difficult to differentiate oneself and scale by selling used cars the traditional way at physical locations.
But an online-only model with massive inventory and home delivery scales so much better, which explains why the company has grown so quickly. In Atlanta, Carvana already has over 2% market share, matching CarMax's nationwide footing.
Additionally, Carvana is one of the few retailers that is benefiting from the COVID-19 pandemic. While the company's sales tanked about 30% year over year at their worst point in early April, sales quickly returned to 20% to 30% year-over-year growth toward the end of that month. That's better than the industry and has been driven by the natural appeal of Carvana's online model and its fantastic customer experience.
The subscription video-on-demand king
Netflix is the dominant streaming video-on-demand business globally, and it has a huge multi-decade runway ahead of it.
One way to look at Netflix's global opportunity is to consider the number of global households that could conceivably subscribe to internet television over the long term. There are about 1.7 billion global households, excluding China, where Netflix doesn't operate. In 20 years, that figure would grow to about 2.1 billion households, and by then, the vast majority of them should have sufficient internet access for streaming content.
In that context, the 183 million global paid streaming memberships Netflix had at the end of March is less than 10% of its long-term global opportunity.
As the company continues to reinvest into more content, the service becomes that much better and more appealing to a larger percentage of the world's population. That allows the company to not only grow subscribers but also to raise prices in line with its increasing value as a service. It's executed that playbook exceptionally well. For example, from 2013 to 2019, U.S. average revenue per user increased at a nearly 8% annual rate.
Global subscription video-on-demand is a massive market, and Netflix is best positioned to dominate it over the long term.