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Spotify (spot -1.64%) believes it can reach 1 billion users by 2030, almost half of its 2022 glorious achievement.
Streaming music leader Spotify added more than 80 million new listeners last year, up 20%, and growth is accelerating from 2021. Spotify is particularly strong in several key areas that bode well for future listeners, subscribers and the company’s revenue growth. Here are three factors behind the company’s massive success in 2022 and what they mean for investors moving forward.
1. Ad-supported
Spotify added nearly 60 million more ad-supported listeners this year.
In fact, the strong ad-supported listener numbers accounted for nearly all of Spotify’s outperformance in overall listener growth. 37 million in 2021 and 46 million ad-supported his listeners in 2020.
Spotify often refers to free, ad-supported listeners as the “top of the funnel.” In other words, we aim to bring in listeners with our free service and convert them into paying subscribers over time. Historically, it has worked very well in strategy.
“Whenever MAU growth is accelerating, [monthly active users]it always tends to be very good for our business and tends to lead to subscribers over time,” CFO Paul Vogel said on Spotify’s fourth-quarter earnings call.
2. The rest of the world
The growing share of Spotify’s total monthly listeners comes from rest of the world.
In fact, 28% of Spotify users were in the rest of the world at the end of 2022, up from 22% at the end of 2021. This suggests that about 47 million new users came from the region. This includes emerging markets such as: India and Indonesia.
The streaming service has seen a significant increase in new users in the region, but the majority of those users are still on ad-supported plans. The share of remaining global paying subscribers will rise from 11% to 12% in 2022. This means that about 5 million people have been added.
In other words, of the 60 million ad-supported listeners Spotify added in 2022, about two-thirds were from the rest of the world. Up until that point, CEO Daniel Ek had warned about conversion rates from free to paid listeners. “Some developing markets may take longer than mature markets,” he said. “But the trend is the same: the longer you stay, the more likely you are to convert.”
3. Generation Z
In late 2021, Spotify executives said Gen Z could do better. In 2022, we have done just that.
Conducted collaborative marketing efforts and product development aimed at a younger audience. Its moves include building or acquiring games like Supergrouper and Heardle, Blend playlists, a place to see your friends’ activities in the app, and social features like islands on islands. robloxIt also became a sponsor of FC Barcelona. Management said the second quarter earnings call was a great opportunity to reach a younger audience around the world.
Hard work pays off. Management points to the strengths of Gen Z listeners in all 2022 quarterly presentations.
What this means for Spotify investors
Investors need patience to see all three of Spotify’s biggest drivers of listener growth pay off.
Young ad-supported listeners in emerging markets will not bring in much revenue at this time. Over time, as their purchasing power improves, they could become valuable subscribers, or at least a valuable source of ad inventory.
Combined with efforts to reduce costs and improve margins, Spotify is poised to achieve positive operating margins in the near future. This could be a major catalyst for stock prices to rise in the long term.
Adam Levy has no positions in any of the stocks mentioned. The Motley Fool has positions in and recommends Roblox and Spotify Technology. The Motley Fool’s U.S. headquarters has a disclosure policy.
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