Spotify: Full Steam Ahead (NYSE:SPOT)

I’ve said it many times since the beginning of the year, but now is the time to be a stock picker.Year-to-date S&P 500 relatively flat, early rally now offset by interest rate uncertainty and recent impact from the failure of Silicon Valley Bank. However, under the major indices, some tech stocks have surged since the beginning of the year, and I think many of their outperformers still have momentum.

SpotifyNew York Stock Exchange: Spot) in particular has been one of the top performing names in my portfolio and will continue to rise. The global streaming leader has grown optimistic after reporting strong fourth-quarter results, with its stock gaining up to 50% year-to-date.

Since my last bullish article on Spotify, I’ve enjoyed generous profits.after loading Considering Spotify’s latest Q4 results, 2023 trajectory, and latest ratings, I’m still very bullish under this name.

As a reminder for investors unfamiliar with Spotify, here’s a rundown of the main bullish factors for the name.

• Spotify continues to roll out new products, proving they work for everyone. A quick rundown of recent major updates: In 2021, Spotify rolled out a new paid tier called ‘Spotify Plus’. While this tier is still ad-supported, users will be able to skip as many songs as they want within her hour, potentially opening up Spotify to more low-end consumers. In 2022, Spotify will also launch audiobooks for the first time, offering a one-time purchase revenue stream.
• Successfully raised the premium. Spotify has increased the price of its family plans in the US, family/duo/student plans in the UK, and all plans in Brazil. The fact that Spotify reported no significant change in churn since the price change went into effect proves that Spotify is relatively inelastic when it comes to music streaming. Additionally, Spotify has proven to be a very sticky platform, with content like podcasts and playlists keeping subscribers hooked on the platform. His ARPU (average revenue per user) on Spotify continues to grow.
• two-sided market. New New Revenue Opportunities for Spotify: Paid marketplace tools for content creators represent another way to fully integrate Spotify into the music ecosystem and grow its wallet share.
• Margin building potential and a strong existing free cash flow profile. Higher advertising rates, a mix shift towards podcasting, and general economies of scale arising from paying for music content spread across a wider user base have given Spotify a large gross margin, alongside a free cash flow profile. can be dramatically increased.
• A slowdown in hiring and operational cost savings from “work from anywhere”. Spotify has announced remote work options for all employees around the world. I believe this is a positive move that can reduce Spotify’s real estate footprint and reduce operating costs in the long term. indicates that you are committing to

Despite these strengths and the recent rally, I still think Spotify is a pretty cheap stock. At a current stock price of nearly $124, Spotify has a market capitalization of $24.08 billion. After subtracting €2.01 billion in cash from Spotify’s latest balance sheet and converting to dollars at the current rate of $1.07, the company’s result is The enterprise value is $21.93 billion.

Meanwhile, Wall Street analysts expect Spotify to post revenue of $14.33 billion in fiscal 2023, up 15% year-over-year (Yahoo Finance data).This puts Spotify’s valuation at 1.5 times EV/FY23 earnings.

In my view, Spotify is going into 2023 with a lot of momentum. The company continues to build a recurring revenue subscriber base that allows it to generate economies of scale at fairly high music licensing costs. Now, in my view, it’s a great opportunity for investors to still buy this iconic brand at a low price.

Q4 download

Let’s take a closer look at Spotify’s latest quarterly results. The company’s fourth quarter highlights are shown in the chart below.

Notably, Spotify exceeded expectations for both users and subscribers. MAU increased 20% year-on-year to his 489 million, beating his internal guidance of 479 million (+18% y/y) by 10 million. Given the size of the year-over-year increase, the fact that Spotify is not a new platform is surprising, but the increase in MAUs has helped both expand internationally into new markets and deepen engagement with existing users. suggesting.

Similarly, premium subscribers increased 14% year-on-year to 205 million, beating guidance of 202 million (+12% y/y). His 10 million new subscribers the company added in the fourth quarter far surpassed his 7 million new subscribers in the third quarter. Clearly, macro effects have proven to be irrelevant to consumers’ music subscription habits.

The company says its year-end Wrapped campaign, which has been running the program for eight years, has been a huge success. The company has 156 million of his MAUs (roughly one-third of the company’s total MAU base) who participated in the campaign, and for the first time he successfully added an artist’s merchandise to the Spotify app. said.

From a geographic perspective, the company noted a particular strength in Latin America, as shown in the chart below, but all regions responded well to the wrapped campaign. Plan continues to perform well.

Revenues were also up 18% year over year. This is due to 14% year-over-year growth in premium subscribers, 14% year-over-year growth in ad revenue, and gains from the impact of FX translation (Spotify benefits from denominated finances in US dollars). , the exchange rate is a headwind for all dollar-based companies).

Q1 guidance (Spotify doesn’t provide a full-year outlook) calls for the addition of 2 million net premium subscribers in Q1 – a promotion-heavy Q4, of course. Although there is a seasonal downside after Spotify, there may still be room for Spotify to outperform estimates.

The big question mark for Spotify, of course, is when will it start becoming profitable? Operating margin was still -7.3% in the fourth quarter as a result of his year in which Spotify increased its investment in both marketing and R&D. Earlier this year, Spotify announced layoffs worth 6% of his global staff.

Spotify CEO Daniel Ek said on its fourth-quarter earnings call that the company has been very careful this year to restructure its business around efficiency.

In 2021, we said 2022 would be the year of investment, and it was. And I know some of you are wondering if we believe that investment was a mistake, given recent news about cost and headcount reductions. And the answer is no and yes.I still believe it was the right call to invest and would do it again […]

Additionally, we didn’t expect these investments to have a significant short-term impact, but they have. But more importantly, our shareholders fully expect us to continue paying dividends in the months and years to come. But things have changed and the macro environment has changed a lot this past year. And in hindsight, I probably got a little carried away and overinvested relative to the uncertainty that the market has created.

That’s why we’re focusing on tightening our spending and becoming more efficient. […] We are also rethinking how we operate to achieve this goal. We streamlined decision-making and set up a new organizational structure that prioritized speed and efficiency. 2023 marks a new chapter for us, but our commitment to achieving our goals remains the same. I am very optimistic about the direction we are headed and remain committed to the long-term success of the company. ”

important point

Strong user growth, multiple routes to monetization, new focus on profitability in 2023 – Spotify has many advantages as it continues to enjoy rare upward momentum. Please stay here longer.