The shares of this music streaming service were just upgraded to ‘Buy’ at Redfern.
Spotify Technology S.A. (SPOT)
From Ian Wyatt’s Million Dollar Portfolio
Netflix (NFLX) has been my best investment—EVER. In the Million Dollar Portfolio, I loaded up on the stock when the primary business was mailing DVDs. Getting invested early means I’m now sitting on 3,479% gains. Today, I’m getting ready to buy a new company that’s strikingly similar to Netflix.
It’s a company that I call “the Netflix of music.” Introducing Spotify Technology S.A. (SPOT). Spotify is the world’s biggest music streaming service. That means the company lets users listen to music “on demand” using a mobile or desktop app. In fact, I’m listening to the Rolling Stones on Spotify while writing this report.
Spotify lets millions of users listen to music for free. This is the company’s advertising supported business. But the heart of the business is the music subscription.
Spotify has 180 million monthly active users. This includes 83 million paying subscribers. The company attracts new users with a free music app. That app includes occasional advertisements. The goal is to convert these free users into paying subscribers. Right now, 46% of the company’s users are paying for a subscription. And that’s a very high conversion rate from free to paid subscriptions. For a monthly fee of $9.99, users can listen to unlimited music – WITHOUT advertising. Spotify offers millions of albums, giving members access to almost everything.
The subscription free is similar to Netflix, which until recently charged $10 / month for video streaming.
In the most recent quarter, Spotify grew its paid subscribers by 40%. Revenues grew 26% to 1.3 billion euros. Only 123 million euros were from the company’s advertising business. For the coming quarter, Spotify expects revenues will grow 18% to 35% year-over-year.
Spotify is losing money. During the latest quarter, the company reported a net loss of 394 million euros. Those losses are expected to continue as Spotify grows and scales its business.
Spotify is well financed with 1.7 billion euros in cash. The company cash flow positive. In the latest quarter, cash from operations was 30 million euros. The company plans to invest 300 million euros to build new offices around the world.
At current prices, the company is currently valued at $29.6 billion. Spotify has 80 million paying subscribers. And that means the market is valuing each paying subscriber at $370. Meanwhile, Netflix is valued at $434 billion. The company has 130 million paying subscribers. And the market value per subscriber is a staggering $3,338.
That means Netflix is valued at nine times more than Spotify—on a per subscriber basis. There are two key justifications for Netflix’s higher valuation. The company is profitable, with $384 million of net income in the last quarter. The company produces original content, which differentiates it from other streaming services. Of course, Spotify could turn profits in several years as the business scales. Netflix also operated with a substantial net loss in its early years. Furthermore, Spotify could launch its own record label. The company is already cutting exclusive deals with some artists. And this could pave the way for a record label in the future.
Spotify shares went public in April. The company did a “direct stock offering”, bypassing Wall Street’s conventional initial public offering or IPO. The stock opened for trading at nearly $166. The stock reached a high of $199 over the summer, before retreating to a current price around $165.
My target price is $220. My target price reflects a valuation of $500 per subscriber. Buy Spotify below $175.
Ian Wyatt, Ian Wyatt’s Million Dollar Portfolio, www.wyattresearch.com, October 5, 2018