$SPOT: The $NFLX of Audio Streaming

Spotify Technology S.A. ($SPOT) is the dominant global audio streaming company.

Famous for its music platform, SPOT will need to execute on its podcast vertical to maximize LT value.

Can it become the $NFLX of audio? Yes.

A thread👇
1/ The Basics

Two Segments:
Premium: Sells subs through Family Plan and Duo Plan

Ad-Supported: Sells display, audio, and video advertising through impressions

Leader because:
- Core competency / singular focus
- Accretive innovation
- ML suggestions (like NFLX)
2/ Market Leader: Audio Streaming

SPOT continues to distance itself from the next best competitor: $AAPL music

$AAPL hasn't disclosed subscriber numbers since June 2019 (60MM)

$AAPL has been podcast leader, but recent initiatives have SPOT gaining market share
3/ Financial Profile (YoY)

Total Revenue: €1.889B (+13%)
- Premium: €1.758B (+17%, 93% of Total) – Subs growth offset by lower ARPU
- Ads: €131MM (-21%) – reduced demand from COVID

GM : 25% (-100 Bps)
- Premium: 28% (+100Bps)
- Ads: -12% (-2500 Bps)

CFO: €30MM

FCF: €4MM
4/ Growth Strategy

1. ARPU: Current focus on growth lowers ARPU, Ads will drive future growth

2. Podcasts: Better economics & differentiator

3. Marketplace: Reduce licensing fees / increase music margins

4. Ad Revenue: Strategic Ad Insertion (SAI) tech to improve performance
5/ Key Metrics

MAUs: 299MM (+29% YoY); 32.7% 3-Yr CAGR

Premium Subs: 138MM (+27% YoY); 29.4% CAGR

Premium ARPU: €4.41 (-9% YoY); -7.3% CAGR

ARPU declines result of product mix in developing markets (family plans) and trial / discount periods to capture market share
6/ My Main Concern

Margins.

High growth software companies have GM +50%; the path to profitability

SPOT GM: 25.4% (-2.5% T12 Operating %)

Aside from solid MAU growth, 125% stock price appreciation from March lows must be factoring in higher future GM - so company MUST execute
7/ Margin Boosting Initiatives

1. Podcasting: This is the key – better unit economics and original content

2. Marketplace: Decrease music licensing costs (huge margin drag)

3. Ad Innovation: SAI and other initiatives to boost ad ROI

4. ARPU: Critical as MAU growth flattens
8/ Podcast Strategy

The $NFLX strategy: High ST investment, LT ROI

Exclusive content: differentiator from competitors

Flywheel w/ music: 21% of MAUs listened to podcasts in Q2 (+100% YoY, 19% in Q1)

Joe Rogan, Michelle Obama, Kim K (true-crime), The Ringer (Sports), DC Comics
9/ Long Runway

+3B smartphones in 92 countries it operates in

Est. 450MM streaming music subs by the end of 2020 (+25%YoY)

$16.4B market in 2020, expected 5.4% CAGR through 2025 ($21.4B), which would still be only 12% penetrated.

SPOT continues to dominate the competition
10/ Conclusion

$SPOT is the dominant leader in an expanding market

Exclusive podcasts is key for LT value

At 4.7x NTM EV/Sales, the market is pricing in higher GM

SPOT will successfully execute like $NFLX w/ original content.

Investors must be patient to realize gains.
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