Spotify (SPOT -4.62%) thinks it can reach 1 billion users by 2030, and it's nearly halfway there after a stellar 2022.
The streaming music leader added more than 80 million listeners last year, up 20% and accelerating growth from 2021. Spotify is seeing particular strength in a few key areas that bode well for the future listener, subscriber, and earnings growth of the company. Here are three factors behind the company's massive 2022 and what they mean for investors.
1. Ad-supported
Spotify added nearly 60 million ad-supported listeners during the year.
In fact, the strong results in ad-supported listenership account for practically all of Spotify's outperformance in overall listener growth. It added just 37 million ad-supported listeners in 2021 and 46 million in 2020.
Spotify often refers to its free ad-supported listeners as at the "top of the funnel." That is, it brings in listeners with its free offering, and it aims to convert them into paid subscribers over time. Historically, it has done well with the strategy.
"Anytime you're seeing accelerating growth in MAU [monthly active users], that always tends to be very good for our business and lead to subscribers over time," CFO Paul Vogel said during Spotify's fourth-quarter earnings call.
2. Rest of World
A growing share of Spotify's total monthly listeners is coming from its Rest of World region.
In fact, 28% of Spotify users were in its Rest of World region at the end of 2022, up from 22% at the end of 2021. That suggests roughly 47 million of its new users came from the region, which includes emerging markets such as India and Indonesia.
While the streaming service saw strong growth in new users in the region, the vast majority of those users are still on the ad-supported plan. Rest of World's share of paid subscribers climbed from 11% to 12% in 2022, implying an addition of about 5 million.
In other words, of those 60 million ad-supported listeners Spotify added in 2022, around two-thirds were from the Rest of World region. To that point, CEO Daniel Ek did warn about the rate of conversion from free to paid listenership. "It may take longer in some developing markets than it does in mature markets," he said. "But the trend is the same, which is the longer they stay, the more likely they are to convert."
3. Gen Z
In late 2021, Spotify's management said it could be doing better with Gen Z; in 2022, it did just that.
It made concerted marketing efforts and product developments targeted toward a younger audience. Some of its moves include building or acquiring games like Supergrouper or Heardle and more social features like Blend playlists, a place to view friends' activity in the app, and an island in Roblox. It also became a sponsor of FC Barcelona, which management said during its Q2 earnings call is a great opportunity to reach a younger audience all around the world.
The efforts are paying off. Management has pointed to strength among Gen Z listeners in all of its quarterly presentations in 2022.
What this means for Spotify investors
All three of the biggest growth drivers for Spotify's listenership require patience from investors to pay off.
Younger ad-supported listeners from emerging markets won't provide a lot of revenue right now. Over time, as their spending power improves, they could turn into valuable subscribers or at least a valuable source of ad inventory. That should produce strong future revenue growth.
Combined with efforts to reduce costs and improve margins, Spotify is set up to reach positive operating income in the near future. That could be a major catalyst for the stock price to move higher long term.
