Os comparto la tesis de inversión de JDP Capital Management sobre Spotify
JDP acquired Spotify Technology (NYSE: SPOT) on a value basis between late 2018 and early 2019 for a price of roughly $110 per subscriber (FY 2019) and 2x 2020 revenue. Spotify also has a partnership with Tencent Music (China and Southeast Asia) through a 9% ownership stake that also looks attractive. We think Spotify is a Survivor & Thriver with a high probability of being worth much more than its current $25 billion market cap within 5 years. Spotify is led and protected by co-founder Daniel Ek, one of the best entrepreneur-CEOs alive today. Originally our Spotify thesis focused on the broader trend from radio to streaming and Spotify’s global market position and loved product. We also said that SPOT should be able to increase subscription prices in low-margin markets over time and grow faster in the US than the market thought. Not to mention the ~$20 billion market for radio advertising that will divided between the big streamers someday. All true. But we are now most excited about the growing visibility into Spotify’s Two-Sided-Marketplace platform and plans to monetize the treasure trove of subscriber data that is growing exponentially.
The platform brings together consumers, artists, content owners, content producers and advertisers to cross-sell within an ecosystem where SPOT charges fees. The idea of Spotify as a marketing platform is not new, the company has consistently discussed its marketplace strategy since going public. Now with 248 million subscribers (4Q ’19) the idea is starting to see traction and should have a small yet positive impact on gross margins in 2020. The Two-Sided-Marketplace is important because it means unlocking gross margin potential beyond the 26% today and moving the company beyond its original business model. Spotify’s original music streaming model (now replicated in big tech bundles) is outdated and competition is growing. The model pays music content owners per song listened which is similar to pricing store rent as a percentage of sales. This cost structure only makes sense as part of bigger strategy because it is nearly impossible to gain operating leverage. SPOT breaks down the Two-Sided-Marketplace into three areas:
(1) Spotify for Artists,
(2) Sponsored Recommendations, and
(3) audio creation tools (Soundtrap and Soundbetter).
Spotify has not disclosed the specific product revenue opportunities by segment because many are still pre-beta. 8 Some of the marketplace products that have been introduced or just discussed by management include:
A) Enhanced marketing tools for record labels to influence the exposure of a specific undervalued song or artist. The tool would give the labels more control over targeted promotion for a fee. In the fourth quarter Spotify launched Sponsored Recommendations and mentioned “Average click-through rates and average listener conversion have been at consistently high rates (+30% for each).”
B) Direct marketing of concert tickets to fans based on proximity and interest. Spotify subscribers tend to be highly engaged with the app which offers the first opportunity to instantly offer access to a concert. High-margin ticketing and advertising revenue is up for grabs from old economy companies like LiveNation who cannot interact with fans on a daily basis. Spotify for Artists grew to 500,000 monthly active artists and creators in the fourth quarter (feeder for creator tool subscriptions).
C) In 2019, Spotify entered the podcast industry in a big way with the acquisitions of Gimlet, Anchor, Parcast and The Ringer. The rising number of Spotify subscribers listening to podcasts (16%) is driving increased retention and reducing churn. Spotify will sell highly targeted advertising within its owned podcast titles, and eventually place ads on thirdparty content accessed on Spotify. Early data on the effectiveness of podcast advertising suggests that audiences tend to be more engaged and interested in the podcast topic than other formats
. The podcast industry is on fire and the price of advertising within high value content will skyrocket off a low base today. Liberty Global CEO Mike Fries stated recently that the podcast industry has 90 million listeners in the US which is estimated to grow 45% by 2022. As of the 4Q 2019 Spotify had 700,000 podcast titles and consumption hours were up 200%.
D) Other revenue sources for the Marketplace include audio production tools for small and large artists. Spotify noted in its 4Q investor letter that Soundtrap had doubled its paying subscribers in the period. Lastly, we like that Spotify continues to prioritize ARPU (average revenue per user) unit growth over revenue per user which is responsibly driving platform scale within cash flow. In 2019, ARPU was down 5% due to extended free premium trial period and geography mix. Despite a 37% increase in the stock last year the market remains distracted by recent subscriber growth of big-tech bundled offerings that includes streaming access to a basic music catalogue.
Part of the industry’s growth is driven by a rapid transition that is happening from radio to streaming as mobile data prices decline. It is also not difficult for big tech to offer a simple streaming audio library that is part of a bundling strategy. We believe the limited audio product features of big tech bundles will not keep up with Spotify’s ecosystem of features and benefits to both listeners and the broader audio industry.
By our estimates Spotify, Apple, Amazon and Tencent Music subscribers represent only 14% of worldwide smartphone users (3.5 billion) and 11% of total mobile phone users (4.6 billion). Competition that introduces people to streaming for the first time is hugely beneficial to Spotify as awareness of the different services becomes an opportunity to win subscribers. Spotify is a core JDP holding and we are excited about the company’s future earning power that is currently under-appreciated by the market. We are also excited to add to the position as new capital is contributed.
