Audio streaming company Spotify Technology (SPOT 7.46%) has been plagued with bad news as of late, resulting in its stock dropping more than 30% from its highs. Between worries over podcasting competition with Apple and Spotify reporting worse-than-expected first-quarter results, investors have rightfully become fretful.
But for investors with a long time horizon, Spotify has made several investments that still appear to be in the early innings. Though it might take time for some of these investments to contribute financially, there are still several areas where Spotify could drive big growth.
Although Spotify already boasts the largest audio streaming platform globally, the company announced during the first quarter that it would be expanding into more than 80 new markets. These 80 markets are home to more than 1 billion people that Spotify could potentially add as new subscribers. Though this big expansion raises expectations for Spotify's subscriber count, it's worth bearing in mind that this announcement was just that -- an announcement.
Launching into new markets takes time, and each one carries its own complications from new languages to different consumer habits. So while the announcement took place during the first quarter, it could be several years until this expansion bears fruit.
However, Spotify does benefit from network effects as users share songs, playlists, or podcasts, which ultimately attract new users to the platform. Spotify's recent partnership with Facebook should help speed up adoption in new geographies as Spotify is granted access to Facebook's 2.85 billion monthly active users.
Early innings for podcasts
In addition to expanding Spotify's user base, the company has also been plowing money into the podcasting space. From originals and exclusives like The Joe Rogan Experience to distribution services like Anchor and Megaphone, Spotify has invested almost $1 billion into podcasts over recent years.
But while these acquisitions might look expensive in the short run, the runway for growth in audio-based advertising is huge. In fact, Spotify's ad-supported revenue grew by 46% in the first quarter alone. To supplement the strong growth, the company also announced the launch of its Spotify Audience Network during its Stream On event in February.
This network will allow advertisers to leverage Spotify's data to target users via podcast ads. Thanks to Megaphone's streaming-ad-insertion (SAI) technology, podcasters can simply input an ad slot anywhere in their show and advertisers can bid on the space based on the particular audience they're looking for.
To help grasp the size of the opportunity, it's worth taking a look at advertising spend across other audio mediums. According to Statista, in 2019 almost $18 billion was spent on radio advertising in the U.S. alone. As Spotify grants advertisers a more targeted experience, it's probably fair to assume that a large portion of that spending will transition over to podcasts.
Flexing its pricing power
With all the new avenues for growth, there's a simple one that's easy to forget about -- raising prices. Spotify has been almost notorious for not budging on its pricing since the company has kept its individual plan at $9.99 in its mature markets ever since its inception. But just last week the company announced some surprising news.
In addition to some pricing changes in the U.K., Spotify is raising its price on the family plan in the U.S. by roughly 7%. Though we're yet to see how this impacts customer retention, this price hike appears to have been long overdue and should help deliver some revenue growth for the company.
With growth in new territories, revenue from podcasting, and the potential to continue raising prices, Spotify seems to have plenty of angles from which it can drive growth. With the stock currently beaten down, Spotify is trading at its cheapest price-to-sales multiple in almost a year. For long-term-oriented investors capable of weathering some volatility, this could serve as a great opportunity to pick up some shares in a company with a bright future ahead of it.