Spotify (NYSE: SPOT)
surged more than 14% to all-time highs as it announced two more big podcast deals. This time, the company signed exclusive deals with Warner Brothers and Kim Kardashian West. These follow Spotify’s exclusive deal for Joe Rogan a few weeks ago, which sent shares up more than 11%. Investing in top-notch content has been a central tenet of Spotify’s strategy.
We’ve seen this unfold before in a different space:
Netflix (NASDAQ: NFLX) has built a worldwide video streaming empire through its investment in original and exclusive content. Is Spotify on its way to similar success?
Spotify has accepted (mild) short-term pain for long-term upside by posting modest losses over the past few years in order to invest in its business.
It has paid off in the form of impressive revenue growth over the past three years. Its most recent quarterly financial results (Q1 2020) showed yoy growth of 22.3%. That comes on the heels of 32.7% yoy growth in Q1 2019 and 26.3% yoy growth in Q1 2018.
Besides the investment in top-notch content, Spotify has had incredible success in another realm:
Attracting free users and converting them into paid subscribers.
Spotify has a free plan and a $9.99 a month premium plan. The company has 286 million monthly active users and 130 million paid subscribers. That means a staggering 45.5% of those using the service are paid subscribers.
The company manages to initially attract users with a quality free service. At this point, instead of using the dreaded hard-sell, Spotify non-intrusively lets users know what they stand to gain by converting to a paid subscription. This way, it avoids alienating (and losing) the users that want to stay on the free plan for the time-being, while generating conversions with presentations of genuine value.
This guiding principle of adding genuine value led Spotify to pursue Rogan, Warner Brothers, and Kardashian West.
Getting the Best
Spotify’s signings of Rogan, Warner Brothers, and Kardashian West really moved the needle. The Rogan deal is worth around $100 million. The financial details of the Warner Brothers and Kardashian West deals are yet to be disclosed, but the figures are certainly high.
Rogan has revolutionized the podcasting industry with long-form discussions that span every imaginable subject matter. His openness to all viewpoints, personability, and high-profile guests have turned him into a cult-like figure.]
The Warner Brothers deal gives Spotify the rights to original scripted narrative podcasts featuring DC Comics superheroes including Superman, Batman, Wonder Woman, Harley Quinn, and the Joker.
Kardashian West has one of the most popular brands in the world. Her podcast will focus on social justice issues.
These announcements are the culmination of a longer-term trend of investing in podcasts; Spotify has invested hundreds of millions of dollars into podcasts over the past few years.
In Q1 2020, the company launched 78 Originals & Exclusives (“O&E”) podcasts globally. Spotify also completed a deal for The Ringer, a site with a large following, headed by Bill Simmons.
As touched on earlier, Spotify watched Netflix layout the blueprint for streaming success. Netflix has invested in its own original content and signed exclusive contracts with several top movies and TV shows.
The news of the three new podcasts demonstrate that Spotify is serious about getting the best. A few names and shows in that upper echelon can drive subscriber growth on their own.
Spotify’s move to all-time highs gives prospective investors two entry points – buying the breakout or waiting (hoping) for a pullback.
The stock is certainly a little extended after nearly doubling since the beginning of April, but its big breakout from a tight range makes it appealing.
The price action on Spotify was attractive over the past couple of months, as it had two sideways moves on light volume that led to two high volume breakouts. This type of action is bullish because it shows that investors are mostly holding the stock in anticipation of further upside.
It’s tough for many to make a long-term investment in a company that’s not profitable. While it’s certainly possible that Spotify’s dynamic revenue growth continues and earnings catch up, it’s no guarantee. The risk/reward does appear solid for a company with so much upside though.
Spotify becomes a bit more appealing in the short-term. As an audio streaming company, it’s barely impacted by the coronavirus pandemic. High revenue growth is a great bet to continue over the next year or two, and investors likely won’t demand high earnings for the foreseeable future.
A pullback would be nice but is no guarantee. If you want to get into Spotify, you’ll have to decide if you want to take that chance or get in now.
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