Please ensure Javascript is enabled for purposes of website accessibility

What I'll Need to See Before I Buy Spotify Stock

By John Ballard - May 22, 2021 at 2:00PM

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

I'm not buying the recent dip for one reason.

Spotify (SPOT -1.22%) is the clear leader in audio streaming. The stock more than doubled in 2020, after adding 74 million new subscribers during the year. 

But after issuing a lower-than-expected forecast for subscriber growth in 2021, the shares are now down 30% year to date. It might be tempting to buy the stock at these lows, especially given the long-term demand trends for streaming services. 

However, the steady deceleration in monthly active user (MAU) growth over the last year gives me pause, especially on the heels of increasing competition for the millions of subscribers that have yet to sign up for a service. There's one thing I want to see before I'll buy shares.

A public transportation passenger holding a cellphone and wearing headphones while commuting.

Image source: Getty Images.

The fight for subscribers is intensifying

Over the last few years, Spotify acquired several companies that bolster its content and technology capabilities for the growing podcast market. Altogether, Spotify spent most of its cash generated from operating activities over the last two years on these acquisitions, but so far, Spotify's investments in original podcast content haven't delivered the growth. 

Spotify's growth in MAUs has steadily decelerated. It reported 31% growth year over year in Q1 2020, but that rate has declined to 24% in Q1 2021. 

Metric Q1 2021 Q4 2020 Q3 2020 Q2 2020 Q1 2020
Monthly active users 356 million 345 million 320 million 299 million 286 million
Year-over-year growth 24% 27% 29% 29% 31%

Data source: Spotify.

The deceleration comes as competition is heating up.

Tidal has gained a niche following with its premium hi-fi streaming plans. It recently secured an investment from Square, which gives it a solid tech partner and financial backing. 

Amazon just announced it will offer Amazon Music HD as a free upgrade for Amazon Music Unlimited subscribers. Amazon Prime members can subscribe to Music HD for $7.99 per month, which undercuts Spotify's individual plan at $9.99 per month. 

Apple followed with the unveiling of Spatial Audio with Dolby Atmos technology, which will bring lossless (better than CD quality) audio to its song catalog at no additional cost to Apple Music members. 

Spotify users are not likely to leave their playlists behind to join these services. Music streaming services have a strong lock-in effect that makes users think twice about switching and rebuilding their libraries.   

The challenge for Spotify is not holding on to what it's already gained, but winning new users to maintain high growth to justify the stock's steep valuation of 4.4 times sales. 

There are still hundreds of millions of people who haven't yet signed up for a music service. That is what's at stake here, which makes Spotify's decelerating growth look weak, especially after following in the footsteps of Netflix by adding original content to stand out from the pack.

Spotify expects even lower growth in 2021

Goldman Sachs estimates there were 341 million paid subscribers across the music streaming market in 2019. That is expected to grow to 1.2 billion paid subscribers by 2030. 

Spotify's "listen everywhere" strategy should keep it solidly in the lead. Still, I want to see how Spotify's growth in MAUs shapes up in the near term before I buy shares.

Goldman Sachs expects the pandemic to accelerate the shift to streaming, which could set Spotify up for a reacceleration in growth, but that's not what management's guidance implies in the near term. 

In the first-quarter earnings report, Spotify lowered its full-year outlook and now expects a further deceleration in growth. Guidance calls for full-year MAUs to be between 402 million and 422 million, or an increase of 19.4% at the midpoint of guidance. That is a far cry from the roughly 30% growth levels Spotify sustained from 2018 through the first quarter of 2020. 

It's not just the law of large numbers that explains the slowing growth. Even CEO Daniel Ek is talking up the company's long-term growth opportunity. "We believe we have at least five to seven times growth left in the business we are in today," he said during the Q1 earnings call.

It could be that the heightening competition from Tidal and other services is making it more difficult for Spotify to win new users. The deep pockets of tech giants could also compete with Spotify on original content deals, and thereby remove the one card in Spotify's pocket to differentiate its offering.

There's no need to make guesses on Spotify's future at this point. I'd rather wait for Spotify to stabilize its growth in MAUs before buying shares.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. John Ballard owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon, Apple, Netflix, Spotify Technology, and Square. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon, long March 2023 $120 calls on Apple, short January 2022 $1,940 calls on Amazon, and short March 2023 $130 calls on Apple. 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
$122.12 (-1.22%) $-1.51
Netflix, Inc. Stock Quote
Netflix, Inc.
NFLX
$248.97 (-0.13%) $0.33
Apple Inc. Stock Quote
Apple Inc.
AAPL
$171.89 (-0.12%) $0.21
Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$141.81 (-1.22%) $-1.74
Block, Inc. Stock Quote
Block, Inc.
SQ
$86.69 (-1.43%) $-1.26

*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
400%
 
S&P 500 Returns
128%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/15/2022.

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.