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10 Reasons to Buy Spotify Stock and Never Sell

By Brett Schafer - May 29, 2021 at 7:51AM

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This audio streaming leader has plenty of things working in its favor.

Spotify Technology (SPOT 2.20%) has a pretty incredible track record. Since its founding in 2006, the company has taken the music industry by storm, disrupting the old distribution models with its streaming subscription service while also taking major tech giants on as competitors (and besting them).

With 356 million monthly active users (MAUs) and a long runway for continued growth, Spotify has the potential to become the dominant global audio platform over the next decade. Here are 10 reasons to buy Spotify stock and never sell.

A tablet, a cell phone, and a computer monitor displaying a music streaming app.

Image source: Getty Images.

1. Consistent growth

Since going public in 2018, Spotify has put up impressive user growth. In the first quarter of 2018, total MAUs grew 30% year over year to 170 million. And this year, MAUs grew 24% to 356 million in the first quarter -- that's 186 million new users in just three years.

The company is able to grow its user base at a consistently high rate because of the ubiquity of its music and audio offering. There are now three billion-plus smartphone users around the globe, the majority of which will want to listen to music or audio in some form. Spotify won't capture every single one of these users, but there is plenty of room to grow with just its core freemium and paid subscription offerings.

2. Improving margins

A big knock on Spotify is the company's low gross margin due to the high payouts it has to make to record labels and music rights holders. However, as it has grown over the past few years, Spotify has shown it can expand its gross margin, at least on the premium side of the business. Last quarter, gross margin was 25.5%, up significantly from the first quarter of 2017 when gross margin was 11.7%. And gross margin is currently under pressure due to the large investments Spotify is making in podcasts and advertising technology. However, once these non-music investments scale, management expects gross margin to hit 35% or higher.

3. International expansion

In February, Spotify announced it was moving into 80 new markets. According to the company, these markets have over one billion potential new Spotify users. Some of these countries like Nigeria, Pakistan, and Bangladesh each have populations of over 100 million. People won't sign up for Spotify overnight, but these new markets can help it sustain its user and financial growth over the next few years and beyond.

4. It is founder-led

Spotify is still led by one of its co-founders, Daniel Ek, who is currently the company's largest shareholder with around 18% of the outstanding shares. While not a guarantee of success, founder-led companies have historically outperformed the market, so it is a good sign that Ek is still at the helm.

5. Podcast listenership

Moving beyond just music streaming, Spotify is now working to make its service a global audio platform. Its biggest current push is to get its users to start listening to podcasts, which will hopefully increase Spotify's value proposition and give the company more chances to monetize its user base.

At the end of the first quarter, Spotify had 2.6 million shows on its platform, up from 2.2 million in the fourth quarter of 2020, while around 25% of its MAUs listened to podcasts on the app. The company is working to convince more and more of its users to switch their podcast consumption to Spotify by getting popular shows like The Joe Rogan Experience and Armchair Expert to become exclusive to its platform. Spotify has also bought out a few studios and started producing original shows to help grow the number of owned podcasts under its umbrella.

6. Podcast advertising

One of the reasons Spotify is investing so heavily in podcasts is the advertising opportunity it brings. This winter, at the company's Stream On event, it launched the Spotify Audience Network, an advertising network that lets companies run audio ads across podcasts on its platform. It is still early days, so time will tell whether this initiative is successful, but it has the potential to serve hundreds of millions of targeted ads to Spotify's growing number of podcast listeners.

7. Podcast distribution

Did I mention Spotify is investing heavily in podcasts? Over the last few years, the company has acquired two podcast distribution platforms: Anchor and Megaphone. Anchor powered more than 80% of new shows for the company this year, which indicates that so far, the acquisition is proving valuable. Megaphone was acquired less than a year ago, but it focuses more on professional content. Its customers include The Wall Street Journal, ESPN, and Bloomberg. Both distribution services give Spotify a large supply of content to potentially run advertisements on, which will help grow its advertising revenue.

8. Flexing its pricing power

In April, Spotify announced it was raising the prices on a few of its subscription plans, including its U.S. family plan. The increases are small (the U.S. family plan is increasing from $15 to $16), but the announcements show that Spotify believes it has embedded pricing power with its subscription offerings, at least in some of its markets.

9. Audiobooks

Spotify is also working to bring more audiobook content to its service. In the past, it recorded chapters of Harry Potter with actors from the movie and recently announced a partnership with audiobook service Storytel that will let customers stream their books on Spotify. 

10. Live audio

With the growth of live audio products Clubhouse and Twitter Spaces, Spotify is trying to ride the live audio boom. Last quarter, it bought Locker Room, a sports-focused live audio platform where anyone can talk about games or livestream during big events. Like with audiobooks, it is still very early days for live audio and Locker Room, so it is unclear if or when the service will become a meaningful part of Spotify's business. But it is an example of what management means when it says it wants Spotify to become an audio platform, not just a music streaming service.

Brett Schafer owns shares of Spotify Technology. The Motley Fool owns shares of and recommends Spotify Technology and Twitter. The Motley Fool has a disclosure policy.

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