PURVIL GHIYA

Spotify

spotify image

  1. Music is really fundamental to life. Which is both good and bad

    • Good: Spotify dominates a category that is so vital. Eg: Tesla in cars, Apple in smartphones, Facebook in social etc
    • Bad: Music is a commodity/ utility

  2. Spotify single-handedly reinvented the music industry and is a clear category leader with almost no competition

    • In terms of paid subscribers, it is 2x ahead than its second place competitor Apple

  3. People just love the product, has a cult like following, and owns the mindshare in music industry

    • 515M MAUs, growing consistently at ~20% yoy
    • 210M paid subscribers, growing consistently at ~15% yoy

  4. USP of Spotify:

    • Playlists (personal recommendation engine driven by data flywheel)
    • Freemium model
    • Original content like Netflix but for podcasts
    • Best user experience

  5. Transition from music to audio

    • Peter Thiel says, 'first dominate a niche then expand' - Spotify dominates the music industry today and now expanding to new verticals like podcasts, audiobooks, live audio etc
    • Higher engagement, low retention and higher conversion to paid subscribers

  6. Margin expansion concerns

    • Primary concern with Spotify's underperformance is gross margins; it pays 75% of every dollar to record labels. However, they have a clear strategy to expand margins going ahead
    • Adding new verticals with high gross margins (Podcasting, audiobooks, live audio, ticketing, merchandise, etc)
    • New verticals lead to more paid subscribers which is already a high gross margin segment
    • As streaming % of revenue of music industry increases, Spotify can/ will renegotiate with record labels (62% today to projected 89% by 2030)
    • Subscription price increase - At scale will show pricing power

  7. Podcasting and launch of SPAN (Spotify Audience Network)

    • Podcasting: still a nascent space with high growth potential, consumption growing in triple digits
    • Acquisition of Gimlet Media, Anchor, Parcast, The Ringer and multiple exclusive deals and investment in original content - Spotify has all the right elements to become a winner-takes-all platform in podcast similar to what YouTube did with video
    • Flywheel: more # of podcasts/ podcasters -> more listeners -> more advertisers -> more # of podcasts/ podcasters
    • SPAN: similar to what Google did with AdWords for web publishing; SAI: Streaming Ad Insertion
    • More paid subscribers + engagement
    • Disrupt radio, $50B spend in advertising annualy

  8. Management

    • Founder-led management, Daniel Ek is a fantastic CEO
    • Skin in the game: Founder/ CEO Daniel Ek owns 7.44%, Co-founder and director Sven Martin Lorentzon owns 11.02%; total founder ownership: ~18%
    • Spotify solely focused on audio; its competitors (Apple, Amazon and Google) not so much; can't bet against focus

  9. Guidance

    • $100B in annual revenue by 2030
    • 40% gross margins, 20% operating margins
    • 1B MAUs by 2030
    • $1B in stock buyback plan over the next several years

  10. Valuation

    • Discounting management's guidance by 15%, 2030 revenue = $85B
    • With 40% GM and 20% OM => 20% x $85B = $17B; applying a P/OI of 10 => $17B x 10 = $170B in market cap by 2030
    • Current market cap: $25B
    • Upside: ~7x in 7 years; return of 32% annually
    • Note: This is highly conservative case