There aren't too many subscription products out there that are likely to be used by billions of people in the future. And there definitely aren't many of them that are trading for less than $50 billion of equity market value right now.
But there is one that I know of: Spotify (SPOT 2.77%). I've long been bullish on Spotify due to its huge global growth opportunity and the several underappreciated levers it has to increase its profit margins over time. Here are three reasons I just bought more shares.
1. A "two-sided marketplace"
On the company's third-quarter earnings conference call, CEO Daniel Ek articulated his vision for the "two-sided marketplace." This is the company's strategy to make money from not only consumers (one side of the marketplace) but also from artists and their teams, the other side of the marketplace.
Ek's vision is about helping artists do three things: grow their fan bases, engage those fans more, and monetize them more. The more Spotify can help artists do this, the more those artists will pay Spotify.
Image source: Getty Images.
When asked if the two-sided marketplace strategy will help artists with live events, virtual events, and merchandise, Ek confirmed it by saying, "And of that, of course, live is a very, very interesting component, as is merchandise as well."
This appears to be an all-out effort to provide as many services to artists as possible, which should be very popular with them given Spotify's enormous scale. And since other marketplace tools like Sponsored Recommendations have "software-type margins," according to Ek, the overall strategy is poised to be a big driver of company profits over the long term.
2. Podcasting
Spotify has made several flashy moves in the podcasting space over the last couple years, including signing Joe Rogan's The Joe Rogan Experience to a multiyear exclusive deal, acquiring a number of podcasting content and production companies, and developing a significant amount of owned and exclusive podcasts.
These moves have helped Spotify rapidly grow the number of podcast listeners. Management disclosed 22% of its 320 million monthly active users (MAUs) listened to its podcast content last quarter. That's 70 million MAUs. Compare that to the 14% of 248 million MAUs, or 35 million MAUs, that heard its podcast content in the year-ago quarter. That means in the last 12 months, the company has doubled the number of MAUs that listened to its podcasts.
Spotify has now come from behind to pass Apple (AAPL 0.52%) as the most widely used podcasting platform, according to music industry group MIDiA Research. The speed with which Spotify accomplished that is impressive.
To make money in podcasting, Spotify is using its technology to better target ads to listeners. The podcast ad market hasn't done that very effectively in the past, so Spotify has the potential to make its ads more valuable and make a boatload of money.
3. Pricing power
Another reason I bought more Spotify stock is management's increasing ability to selectively raise its subscription prices. In the markets where Spotify has tested a price increase, like Norway, it has seen "no impact whatsoever" on subscriber retention, according to Ek.
Price increases appear long overdue. In the U.S., a Premium Spotify subscription costs $9.99 per month, the same since the service launched in 2011. That's a long time without raising prices, considering inflation. According to the Bureau of Labor Statistics Consumer Price Index, $9.99 in 2011 is equivalent to $11.56 in today's dollars after adjusting for inflation. So the fact that Spotify still costs $9.99 today means its price has actually dropped about 14%, adjusting for inflation. So its U.S. subscriber base would probably be fine paying $11 or $12 per month.
This is important because Spotify hasn't been widely considered by investors to have much pricing power. Much larger technology companies like Apple, Amazon, and Alphabet (with YouTube) offer streaming music subscriptions, too, and many investors have assumed that the competition would prevent any of them from having pricing power. So if Spotify does successfully raise prices in a major market like the U.S., investor sentiment toward it should improve.
These three reasons, coupled with the stock's post-earnings sell-off, led me to buy more shares and call Spotify my top stock to buy in November.
