With Apples recent announcement of its Apple One bundle, the streaming service market share may shift sooner than anticipated. The Verge logo. The firm earns a bottom-quintile return on invested capital (ROIC)because it earns negative NOPAT and has negative invested capital. Improving its ad-supported revenue model drove overall revenue growth. And this is what we estimate the company made last year from its 15-percent fee. In other words, SPOTs current valuation implies the company will grow its paying user base to more than 11 times Sirius XMs, 7.5 times Apple Musics, and two times Netflixs. Also, notice that such a growth rate would be 2.4 times the industry's expected growth rate as a whole! Today, the music streaming business is even more competitive, and the current streaming music market leader could face a similar fate. The ratios here only apply to people who paid at least at the generosity threshold of >=2 cents/pence/etc. In this case, Spotifys and Bandcamps interests are unusually aligned. All of these services are heavily dependent on the Big Three labels for their content. The YoY increase in royalty payments is up from the 20% YoY increase in 2018. Over the last ten years, the music industry has waged a relentless war in Congress and the courts to force streaming companies to pay more for the music they play. The event was so popular that the company has continued holding them on the first Friday of every month since. Due to its position in the streaming market, its outsized influence on other participants, and our interest in editorial brevity, Spotify is the only streaming service seriously examined vis vis Bandcamp in this report. FTC: We use income earning auto affiliate links. As you can see below, the company is quickly growing its FCF with its revenues. Spotify has 188 million Premium users, but continues to lose money The precise extent to which the same can be said of Apple Music (the second-largest streaming platform) or Amazon Music (the third) is debatable, but in most regards, theyve made no marked gestures in the opposite direction. Spotifys Falling Profitability Is a Sign of Competitive Industry. For this, we can look at the ongoing secular trends that affect SPOT. They just revealed their ten top stock picks for investors to buy right now. It is true for every single country in the top 50 countries studied, and it is probably true for those beyond the top 50 as well. *Average returns of all recommendations since inception. With that in mind, lets look at one last graph. Click here to get access to the full list! Here are three key reasons it happened. Rogan has apologized for the controversy and said he will make more effort to educate himself about topics discussed and fact-check guests that speak about controversial topics. Matt Lynley. 'GET OUT OF THAT PLACE':Rocker Neil Young has a message for Spotify workers. Chart: Spotify: Net Loss Despite Steady Subscriber Growth | Statista To justify its current price of $242/share, Spotify must: See the math behind this reverse DCF scenario. Spotify profitability not a priority, says company, on Q2 results - 9to5Mac Nov 16, 2021 6:20 AM EST Spotify stock ( SPOT) - Get Free Report has been declining since the beginning of the year, accumulating losses of more than 10%. SPOT Revenue And Core Earnings. I mean, I had the same issues with google and netflix when they were at this early stages, and assumed the stock price at that time doesn't account for the valuation with little or zero earnings. Keithen Drury has no position in any of the stocks mentioned. To illustrate this, lets say you have a Nigerian artist and a Nigerian buyer. And finally, the CAPM can help us price such hypothetical future free cash flows. Further investment becomes a needless risk that jeopardizes a safe source of income. These long-term incentive awards are provided upon hire as well as during employment at the firms discretion. I first warned about Spotify inApril 2018and again inAugust 2018. Therefore, I recommend investors pass up on Spotify for now, but look for a potential entry if the stock revisits $225. We retrieved that data through the endpoint that powers this sales feed once per minute, since hitting the endpoint more often did not yield more results. According to Spotify, its long-term incentive awardsare designedto align a portion of its executives compensation to the interests of its shareholders. Special thanks to Cade Diehm (New Design Congress), Chris Golinski (HP), Ayelet Gneezy (UC-San Diego, Rady School of Management), Minah Jung (NYU, Stern School of Business), and Matt Stoller (American Economic Liberties Project) for their conversations and feedback throughout this project. The root cause of Spotify's profitability issues could be summed up in two words: Minimal Leverage. However, for some analysts, one catalyst. Be sure to check out, theres no money in the streaming music business, What is Vision Pro for? Heres a total conjecture that could be completely wrong, but is one possibility nonetheless: Ironically, it could be because of the companys very profitability. One of the Coalitions members is Spotify, which has for years ironically accused Apple and Google of monopolistic behavior. Coming back to the article title, yes, I do think Spotify investors should be concerned about the company losing money and the lack of margin expansion. Deezer Originals offers users special extended play records, podcasts, and videos. Will Eli Lilly Stock Continue To Rise After 40% Gains In The Ongoing Inflation Shock? My previous reportnoted how difficult it is for Spotify to grow its margins long term due to its dependency on just a few music labels known as the Big Three for much of its content. As the stock price rises, momentum investors may believe there is opportunity left in this stock. The item type matters and the locations of the parties on both sides of the transaction matter. Spotify's stock may do well, but it just isn't right for me at the moment. This adjustment represents 8% of Spotifys market cap. While no specific date has been released, Apple will bundle its existing services, such as Apple Music, Apple TV, and iCloud at a cheaper rate than purchasing all three alone. Most of our major metrics Subscriber growth, Revenue, Gross Margin, and Operating Income performed better than expected this quarter. I optimistically assume that Disney can grow Spotifys revenue and NOPAT without spending any working capital or fixed assets beyond the original purchase price. Its hard not to assume that this explains the particularly large ratio for the microstate of Luxembourg. According to the company . In 1Q20 alone, Spotify launched 78 Originals and Exclusives podcasts to bring its podcast catalog to over one million, or about $700 per podcast. In the second scenario, I use a revenue growth rate of 25% in years one through five. an outlet the company notes is "profitable. Perhaps all of this is overstating the existence of competition between the two ecosystems; in many ways, they can be seen as complementary, as streaming provides an avenue for music discovery and Bandcamp an avenue for economic relationships Diamond once compared Spotify to the radio, a place to find new artists. Competitors entrance into the market, along with their vast resources and marketing capabilities, coincide with Spotify losing market share. If we had no other information than this estimate alone, wed believe him. This number does not include BCF sales and similarly accounts for the differences in prices based on normal days vs. BCF, as well as item prices. And so, I believe the bullish thesis has mostly played out by now. It posted an operating profit of 94. In that case, the company restricted what was a previously open file standard to one that was closed. This has been the explicit mission statement of CEO Daniel Ek from the beginning, and it was the idea behind its music for every mood advertising campaign, which it ran until last year. From the archive: The great American tax haven: why the super-rich love While the Bandcamp mobile app isnt terribly feature rich, the features it does offer work almost entirely without incident. Investors still had severe doubts about SPOT being able to retain its lead against giants like Apple (AAPL), Google (GOOG) (GOOGL), or Amazon (AMZN). Major expense items in its P&L, like R&D and certain finance costs, aren't really operating expenses. Consequently, the stock has increased dramatically. before pulling the trigger. S&P Index data is the property of Chicago Mercantile Exchange Inc. and its licensors. As a brief note, Bundle refers to digital discographies, in which artists sell all or many of their albums for a discount. Just as we were wrapping up this report, Twitter and Square CEO Jack Dorsey announced that Square would acquire Tidal, the long beleaguered Norweigian music streaming service an announcement that was preceded by Twitters bid to acquire newsletter platform Revue. On average, buyers are more generous to artists in their own countries. . (Photo Illustration by Igor Golovniov/SOPA Images/LightRocket via Getty Images), The Macroeconomic And Real Estate Situation At Mid-Year: Cue The FOMC Again, Where The Money Is Going In Market Sectors. With faster growing competition, Spotify is in a difficult position to maintain its market leadership position. The person said theyd bring it up to others in the company as an idea for any artists who want to pursuethe underground look.. Moreover, the music streaming market is likely going to continue concentrating among even fewer players. I use the higher growth rate in scenario two to illustrate a best-case scenario where I assume Spotify could grow revenue faster while being integrated within Disneys existing business. Cost might modulate generosity to some extent, as people pay more for lower priced tracks than for digital albums. If this is true, there are two developments that could unmoor this complacency. But other than that? They want to be the next Netflix and the management knows the original contents is the key. Fully elucidating the meaning of this graph requires volumes; in an earlier conception of this project, it was the reports main focus. Which Stock Is A Better Pick For The Next Three Years FedEx Or UNH? This is not the same as an illegal acquisition in which a company either buys market share or competitors. You may opt-out by. Companies like Facebook, Amazon and Google grew to their current sizes by pursuing strategies that even politically moderate policy makers now recognize as criminal. The popular French streaming service, Deezer, has access to plenty of exclusive content as well. This is the ur-distinction between the two from which all others originate. Companies at this nascent stage with transition to new idea is not possible to value using traditional model. In the course of this research, one of us suggested to someone at a record label that publishes its artists music exclusively on streaming platforms that they should throw a few tracks on Bandcamp and see what happens. Though at this point, it's more of a valuation problem, I believe. Spotify Technology has learned a new song. This year, it increased its gross profit by 1,850% to 117 million euros. Similarly, System of a Down refers to that bands release of a two-track EP to raise money for victims of the Armenia-Azerbaijan conflict. The Hard Rock tag is disproportionately associated with that same EP, a co-occurrence similar to that of Brony and Pony. Figure 9: Implied Acquisition Prices for Value-Neutral Deal. Spotify will never deliver what its artists endlessly appeal for: Fair remuneration and good-faith avenues for artist development that dont involve payola or the equivalent of musical SEO. Bandcamp built a modern business model on what often feels like outmoded tech, while Spotify built an outmoded business model on modern tech. Even in this best-case growth scenario, the implied value is far below Spotifys current price. Valuation: I made $5.8 billion of adjustments with a net effect of increasing shareholder value by $1.3 billion. Enable Spotify background play on phones 1) Power on your Android phone and then launch the Settings app. Those investors better get used to disappointment. About 70 percent of Spotifys costs go to licensing fees with record companies. Over the long term, Spotify plans to make money in many other ways, including podcast advertising and selling audiobooks. Recording artists like Neil Young and others have pulled their music from Spotify's streaming subscription service in protest over what they believe is misinformation regarding COVID-19 being discussed by guests on Rogan's podcast. not just Spotify, because Spotify is arguably . Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body. FORTUNE is a trademark of Fortune Media IP Limited, registered in the U.S. and other countries. Whether an item is priced at $0 or priced at $20, whether its on a day when the artist is reaping the entire sale or just most of it those matter too. Spotifys 2Q20 ARPU represents a 9% YoY decline. Source.. Thus, I feel it's better to pass up on SPOT at these levels but look for potential entries if it pulls back. She has previously released albums on the platform, but A) we dont have all the sales in our data, and B) they were not exclusively released there. Instead, it has become a moderately profitable company without any expressed intent to take over the world. Since the introduction of BCF, artists have begun aligning releases accordingly, and BCF is now not only the day when people buy the most, but when the most music is released. Cost basis and return based on previous market day close. The conditions most beneficial to Bandcamp are those that favor value creation and that disfavor empty speculation and criminality. We explored the challenge of analyzing Bandcamps genre tags previously, as artists are free to attach whatever tags they like. Flickr. Higher costs in research and development (R&D) and sales and marketing (S&M) drove the larger-than-average Q4 loss. I have no business relationship with any company whose stock is mentioned in this article. Invest better with The Motley Fool. If Spotify is so huge, why is it losing money? - ABC News After all, free content (even if it includes advertisements) will always be compelling for a broad segment of users. The idea of venture investment is that in a portfolio of ten companies, nine of them fail and one of them 100xs. Spotify has generated a cumulative -$246 million in free cash flow (FCF) over the past three years. Yet, unfortunately, it seems like investors may be getting ahead of themselves. Because Spotify has invested aggressively to build out its podcast content, advertising, and licensing strategy. Theres no reason to doubt Diamonds claim. But advertising gross margin has plummeted, reaching only 1.8% in Q3. The Success Of Streaming Has Been Great For Some, But Is There A - NPR Well work on entirely new listening experiences to bring fans closer together, simple integrations for merch sales, modern collaboration tools, and new complementary revenue streams.. Muslims have failed to understand Dua of Safar. This was a 23 million increase from Q2, a record net addition. Bandcamp publishes the sale of each item through a live feed on its homepage. This is a good point. Even though Spotify is considered a tech stock, its margins are far from its software-as-a-service (SaaS) counterparts. The end game here isnt hard to fathom: If autumn walks and day dreaming are best accompanied by certain music, and we can figure out what those sounds are, why have artists make them at all? This album page is also no longer available and the exact charity cant be recalled, so the association with a charity comes from memory (as well as the >9 ratio the particular album has). Its unclear why a partial disparity like this exists, but its worth pointing out. June 12, 2023 9:48 AM PT. The number of shares sold short has decreased by 3% since last month. The Motley Fool has positions in and recommends Spotify Technology. In both regards, Spotify is pursuing the twin prongs of a standard Silicon Valley business model, in which a company burns investor cash until humans have been removed entirely (a la Uber with self-driving cars) and/or until theres almost nowhere else left for consumers to go to get what they previously purchased from a variety of sources (a la Amazon). If someone rounds up a $3.99 item to $4, are they generous? The most reasonable interpretation of this graph is that it captures multiple moments of shared self-identification: people who know each other, people who feel affinity for a local geography, the shared culture more likely to emerge within a country, and even the likelihood that the experience of the artist results in music more likely to resonate with that of the listener. Well, on that day, Phoebe Bridgers released a cover of the Goo Goo Dolls Iris, of which she sold 43,942 copies for a total of $178,735. Are they chronic nicotine users? Below, I quantify the high acquisition hopes that are priced into the stock. Should investors be concerned about the music streamer's prospects going forward? So far as we know, there is currently no trade group advocating in this area. But were not even halfway done, so were going to keep this part short: People are compelled to spend money on things with which they self-identify.. I'm not uncomfortable holding unpopular opinions, nor do I seek them. The company just released fiscal 2021 fourth-quarter earnings results, which include some telling numbers about the state of the business. First, investors need to know that Spotify has large liabilities that make it more expensive than the accounting numbers would initially suggest. Premium music subscriptions are the majority of Spotify's revenue today, with the segment generating 2.65 billion euros of revenue last quarter, and should keep growing as long as MAUs grow as well. For example, Spotify offers over50 million songsin its catalog while Apple Music, Amazon Music, and YouTube Music each offer 60 million songs. Spotify reported a consolidated gross profit of 2.6 billion in FY 2021, generating a consolidated gross margin of 27%. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. UKRAINE - 2020/10/06: In this photo illustration a Spotify logo seen displayed on a smartphone. Additionally, we only examine items that have price floors, since instituting a threshold would be a doomed enterprise, given the impossibility of setting a single standard that would make sense across every currency. But it is still failing to expand its gross margin. The mean and median here are measures of the ratio of generosity i.e., for the people who did spend >= 2 cents/pence/etc. 8/16/2022: A smaller analysis looking at income distribution on Bandcamp. Achieving a 60% share of the global streaming music market is a very large expectation especially considering that the firm must do so in direct competition with large, established companies such as Apple, Google, and Amazon. However, it does have positive free cash flow. If you didnt and would like to lodge a complaint, contact mail@components.one. above the item price, the magnitude by which they did so.. 3/9/2022: My reaction to the Epic acquisition of Bandcamp. Spotify: Making Profits On Thin Profit Margins - Seeking Alpha Listen on Spotify Send voice message. Spotify is within inches of turning a profit Down 41%, Should You Buy This Beaten-Down Growth Stock? Spotifys peer group includes other firms that provide subscription-based content services such as Apple, Alphabet, Tencent Holdings Ltd (TCEHY), Netflix, Amazon, and Sirius XM Holdings Inc. (SIRI). Now lets say that same buyer purchases an album priced at 1 from an artist in France, and they pay 1,50. And after discounting its 2025 FCF back into the present and valuing it at the implied CAPM fair multiple, it seems that the company is still overvalued by 36.3%! Without significant increases in the margin or revenue growth assumed in this scenario, an acquisition of SPOT at its current price destroys significant shareholder value. Why are True Ventures and Garlinghouse, who, as the companys only listed investors, most likely sit on Bandcamps board, not pushing for the company to modernize its architecture, aggressively market itself, and demand all manner of things venture investors do to effectively put a gun to CEOs heads and tell them to grow or die? Spotify seems relaxed about failing to make a profit. I love the markets and everything related, and now Im able to be a full-time investor. And once youve found everything you can measure directly from Bandcamps data, youll have to account for all the things that you cant. With its rising ad-supported revenue, the stock may reach a point where it enters my portfolio, but there are just too many better investments available. Why Is Spotify Not Profitable | Techie Heap The last-announced number was 60M way back in June 2019. But if you dont, leave with this: Bandcamp has become an extremely rare type of company, a profitable startup, by doing nothing more than providing a threadbare platform for the chaotic variables of human experience to interact during economic transactions. Spotifyscore earnings[1]fell from -$8 million in 2018 to -$292 million over the TTM. Since my first report, the stock is up 63% while the S&P 500 is up just 28%. . Capping more than two years of turmoil and transformation, the Golden Globe Awards are officially under new management. Here's what may have gone wrong. Balance Sheet: I made $4.3 billion of adjustments to calculate invested capital with a net decrease of $2.3 billion. And doing the second both takes a long time and is only possible because of a weak antitrust apparatus in the US that has for decades allowed predatory pricing (i.e., pricing below cost to push out competitors) and no-questions-asked mergers and acquisitions and that apparatus is rapidly course correcting. Again, we dont know, but the sale of the track does begin to give lie to the claim that the fans of larger artists are passively absorbant of whatever sound the artist emits that there is in fact a relationship there, and as such, there is an economics. This assumption is highly unlikely but allows me to create best-case scenarios that demonstrate how high expectations embedded in the current valuation are. Finally, it argues that Bandcamps marketing and software development efforts, while good intentioned or at least neutral, leave enormous potential for growth untapped. One bright spot: Spotifys ad revenue more than doubled, which the company said was helped by podcast ad sales including for The Joe Rogan Experience and the Obamas Higher Ground podcasts. Should the firm have another earnings miss, shares could go lower. It will not do this because the existence of music beyond basic hormonal modulation does not interest it, and therefore, the existence of musicians does not interest it. In addition to base salaries, each of Spotifys executives have earned long-term equity incentive compensation.
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