Stock Pitch 9: Spotify
King’s Capital are constantly assessing new opportunities, and recently, Spotify was pitched as a strong long-term investment by our team members, Fatima and Clemence. As a leader in the global music streaming market, Spotify is expanding rapidly with its AI-driven algorithms and growth in podcasts and videos.
Spotify, based in Stockholm, has revolutionised the music streaming industry. With millions of songs and podcasts at users’ fingertips, Spotify’s freemium business model offering both free, ad-supported access and paid subscriptions has proven highly successful. The company’s market cap and its P/E ratio suggest that investors are expecting significant future growth. While Spotify is well-positioned to grow, much of this potential seems already priced into its stock. The freemium model has successfully driven revenue growth, with paid subscriptions making up the lion’s share. AI-powered recommendations have further boosted user engagement, contributing to increased Premium subscriptions. In the past few months, shares have surged by 32%, a reflection of growing investor confidence in Spotify’s ability to sustain its momentum.
Spotify’s strategic initiatives also set it up for continued growth. A recent partnership with Universal Music Group aims to introduce new paid subscription tiers and expand both audio and video content, further enhancing the value for users and artists alike. Video podcasts are an exciting area of growth, with more than 300,000 video podcasts and a 60% rise in monthly views. Spotify has also made a series of key acquisitions, including Anchor (a podcast creation platform) and Gimlet Media (a podcast production company), which strengthens its competitive position in the podcasting space.
Spotify is well-positioned to capitalise on several key growth catalysts that could drive its future success. First, the expanding music streaming market, projected to reach $35.45 billion by 2025, offers significant growth potential, with Spotify set to capture a large share of this growing sector. Additionally, its strategic partnership with Universal Music Group will introduce new subscription offerings, benefit artists, and enhance content for consumers, further boosting Spotify’s appeal. Lastly, the company’s rapid expansion into video podcasts puts it in direct competition with YouTube, potentially driving higher user engagement and solidifying its position as a leader in digital content. Moreover, while Spotify’s expansions into podcasts, audiobooks, and video content are promising, it faces intense competition, especially in the video space where YouTube continues to dominate. To effectively compete, Spotify will need flawless execution. Another consideration is the perceived overvaluation of the stock, which adds a level of risk. If Spotify fails to meet investor expectations, particularly with rising competition and potential slower growth in certain markets, the stock could experience a significant correction.
Spotify remains a leader in the music streaming industry and has considerable growth potential, particularly with its expansion into podcasts and video. However, after a thorough evaluation, we concluded the stock is priced too high relative to the risks and competition it faces to align with our long-term strategy. While we have decided not to take a position in Spotify at this time, we will continue to monitor the company closely, as its ability to execute its growth strategy could make it an attractive opportunity in the future.
Disclaimer: This is not financial advice but our personal opinion. King's Capital will not be held liable for any gains or losses incurred by following this information. Our analyses are based on paper trading, with no real capital allocated.
