Please ensure Javascript is enabled for purposes of website accessibility

Is Spotify Stock a Buy?

By Andrew Tseng – Sep 25, 2020 at 11:37AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

This is an easy one.

It's not hard to conclude that the stock of Spotify Technology (SPOT 6.48%) is absolutely a buy. The company has already established itself as the global paid music-streaming leader, which suggests there is a lot of growth ahead of it, given music streaming adoption is still in its infancy. But the company has even larger ambitions than just music alone.

A long runway

Spotify had 299 million total monthly active users (MAUs), including 138 million Premium subscribers, at the end of June. Those figures grew 29% and 27% year over year, respectively, during a period greatly impacted by the COVID-19 pandemic.

And the company's total addressable market is vast. There are over three billion payment-enabled smartphones in the territories Spotify operates in or plans to enter, and smartphone adoption increases over time. In addition, there is precedent for global digital platforms to eventually have user bases numbering in the billions. For example, Alphabet's YouTube has over two billion logged-in monthly users, and Facebook has over three billion monthly users across its platforms.

A man sits in a chair with his eyes closed listening to music on headphones.

Image source: Getty Images.

While Spotify does face competition, it has been distancing itself from its largest peer. Apple Music, the No. 2 competitor, used to update subscriber counts periodically but has been mum about it since June 2019 when the company said it had 60 million subscribers. According to MIDiA research, Spotify has widened its lead against the iPhone maker in 2020.

Sustainable advantages

Spotify is dominating the paid music-streaming business for a very simple reason -- it has the best product -- though many investors wonder if that's a sustainable competitive advantage, because, in theory, technology can be replicated.

But what's not so easily replicated is focus: None of the big tech companies Spotify competes with rely on music streaming for their survival. Given its singular focus, Spotify continuously invests in improving the user experience. It was easy as the industry leader to justify spending 615 million euros ($722 million) on R&D last year. It knows the global audio streaming market is huge and is its to lose.

Spotify's industry lead is especially impressive, because it has an inherent disadvantage in not owning its distribution. It relies on platforms from some of its biggest competitors like Apple and Amazon to reach its user base. In contrast, Apple Music has a direct line to users of the company's 1.4 billion devices around the world. Similarily, Amazon, Alphabet, and even Facebook have smart speakers in millions of homes. The fact Spotify leads the market across these many ecosystems highlights how strong its product must be to overcome that inherent disadvantage.

Not just music

Spotify has a clear path to growth as it expands globally, but it's not just relying on music. Over the last few years, it has invested hundreds of millions in podcast platforms and exclusive podcast content. For example, Spotify spent 357 million euros ($419 million) to acquire podcasting businesses Gimlet, Anchor, and Parcast last year.

Later, Spotify acquired Bill Simmons' The Ringer, a podcast and media business, for up to 180 million euros ($211 million). And the company's deal-making grabbed headlines once again when Spotify signed the The Joe Rogan Experience to a multiyear deal reportedly worth over $100 million. 

Spotify is likely to use its new exclusive podcast content to drive both Premium subscriber growth, at least in the short term, and high-margin podcast advertising revenue in the long term. That's especially true as Spotify improves its monetization efforts, including its Streaming Ad Insertion tool that should allow targeted and measurable podcast advertising. Advertisers can get more value out of targeted podcast ads, which should persuade them to pay more, padding Spotify's bottom line.

A couple of decades from now, we're likely to look back on today as a time when investors could have bought Spotify for a song, because the market didn't sufficiently appreciate its long-term revenue and profit growth potential. That's why Spotify stock is a buy.

 

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Andrew Tseng owns shares of Amazon, Facebook, and Spotify Technology. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Facebook, and Spotify Technology and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Spotify Stock Quote
Spotify
SPOT
$94.77 (6.48%) $5.77
Meta Platforms, Inc. Stock Quote
Meta Platforms, Inc.
META
$141.23 (1.89%) $2.62
Alphabet Inc. Stock Quote
Alphabet Inc.
GOOGL
$101.42 (2.81%) $2.77
Apple Inc. Stock Quote
Apple Inc.
AAPL
$145.22 (1.95%) $2.77
Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$121.97 (5.25%) $6.09
Alphabet Inc. Stock Quote
Alphabet Inc.
GOOG
$102.21 (2.93%) $2.91

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
331%
 
S&P 500 Returns
106%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/04/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.