Shares of Spotify Technology (SPOT -1.49%) are down 53% over the last year. That underperformance is despite an acceleration in revenue growth last year. An increase from premium subscriptions and ad-supported revenue contributed to strong top-line growth, but concerns over slowing growth in monthly active users have weighed on the stock's performance.
But there's one number that says the stock could be a bargain at these levels. Per-capita spending on music remains well below its peak in 1999, but the comeback in vinyl records suggest the interest in music is stronger than ever.
As the leading brand in audio streaming, Spotify can capitalize on growing demand for music to periodically raise subscription prices. This is one tool at its disposal to keep revenue growing for a long time and create compounding shareholder returns.
Image source: Getty Images.
Music spending is well below its all-time peak
In 1999, the inflation-adjusted revenue per capita for music was $81, according to JP Morgan Research. By 2014, per capita spending had fallen to $24.
This doesn't reflect a decline in the interest in music, but more likely reflects the erosion in sales of more expensive physical media in favor of growing adoption for affordable subscription services. Music is in demand, but it's gotten a lot cheaper to enjoy thanks to Spotify.
In fact, per capita spending is trending up again. It reached $37 in 2020, and it could grow for years.
Physical media is not dead
Vinyl sales have exploded over the last 10 years, and there are no signs of its slowing down. In 2021, LP sales surged more than 50% to 41.7 million units, surpassing the rate of increase in digital music.
The great vinyl comeback might seem like a headwind for a streaming service, but it's actually great news when viewed in the broader context of growth in the recorded music industry.
Vinyl sales made up less than 5% of total album sales last year. The important thing is that vinyl sales are growing even while streaming continues to take a greater share of recorded music. Between 2014 and 2020, total record music revenue increased 55% to $21.6 billion, with streaming accounting for the majority of industry revenue.
Image source: Universal Music Group. Figures in billions.
Growing interest is a big tailwind for Spotify
People love music, but they are not spending as much for it as 20 years ago. This means consumers might be willing to spend a little more for a Spotify subscription than investors think.
Last year, Spotify raised its subscription fee for some of its plans in larger markets. During the third-quarter earnings call, CFO Paul Voger said Spotify is pleased with recent subscriber churn levels and added that "everything has pretty much been in line with our expectations, if not slightly better."
Unlike Netflix, Spotify hasn't raised its subscription prices to keep up with inflation, but its recent pricing adjustments and outlook for growth in revenue per user might change that.
Spotify's average revenue per user (ARPU), excluding currency changes, increased by 1% year over year in the fourth quarter. Management expects ARPU to be flat to up slightly again in 2022.
Long-term growth catalyst
Spotify is in a good position to benefit as spending per capita continues to narrow the gap with the levels in 1999. The big three music rights holders -- Universal Music Group, Sony, and Warner Music Group -- are dependent on streaming services to distribute music digitally to the masses. As Spotify further distinguishes its service with investments in podcasts, it strengthens its ability to periodically raise prices and fuel revenue growth over the long term.
It's for these reasons I believe Spotify is a great investment at these lower share prices. The stock has lost half its value, but there are clearly tailwinds in the music industry that are going to benefit this leading streaming service over the long term. Owning businesses that can raise prices can lead to powerful compounding returns, as consistent growth in the business pushes the stock price to new highs over decades. In 30 years, Spotify could be one of those compounding machines you'll wish you had bought.
