Thoughts on Spotify at $140
$SPOT is down 60%+ off its ATHs. It is a major wealth creation opportunity.
To combat the reflexive nature of the market during the downturn, I have been sharpening my thinking. Below follows a condensed take on how I view Spotify at the current price levels.
Firstly, my macro view is that with or without inflation / a third world war, strong tech companies will be far better businesses ten years from now. The market is now pricing in quite the opposite in many cases, yielding plenty of opportunities in the space.
Secondly, Spotify is trading at a PS ratio of 2.37. The market is effectively saying Spotify is a relatively worthless music streaming platform with poor unit economics, with no prospects of it moving beyond this situation.
The above is not the case, for the very simple reason that users and creators of the platform are interacting with each other at low levels of dimensionality, whilst the potential depth of interaction is infinite and of very high value to both parts.
Let me explain.
As a user, all you can do on Spotify today is listen to podcasts and music (1D interaction, if you will). Still,
users often long to interact more with creators, whilst
creators want to engage and monetize their audience more, because that is how they make a living.
Per its last report, Spotify has 406m MAUs and around 8 million creators. So in fact, Spotify is the world´s leading audio infrastructure for the creator economy, which is going to add billions of $ to its top line at a marginal cost.
Here´s how to think about this:
Suppose you spend lots of time learning about fitness and wish to share this with the world. You make content for free about fitness and gradually build an audience. Eventually, you build super fans, that would be more than happy to pay you $500 per year to interact deeply with you, be it through:
Exclusive content
Specialized education programs
One on one sessions
Access to exclusive groups
To infinity and beyond
If you manage to acquire 1000 super fans, you make $500,000 yearly. It´s a great business.
Audio is now a great way for anyone to build an audience and develop super fans, thanks to the emergence of podcasts. Need I go further? The numbers could be something of the following sort:
By 2030, 1b listeners and 50m creators (according to management).
On top of the streaming fees + advertising biz (growing fast), we could have:
An average of $2,500 gross revenue per year per creator
With Spotify´s take rate at say 5% (Substack takes 10%, for example)
$2,500 * 50m * 5% = $6.25b extra to Spotify´s top line
The above revenue would be generated at a marginal cost, because it would be brought about by adding software features on top of the current infrastructure that the market despises, which is the most costly part of Spotify´s business. Adding software features that enable interaction is far cheaper than building a worldwide audio network.
You can play around with the numbers all you want, but the core logic persists.
The above thinking somewhat ignores the potential of Spotify as an ad network. Every day it learns what people around the world like to listen to and that is simply $GOOG style potential.
All in all, the bottom line is that what the market is failing to understand is that, at its lowest level, Spotify is a network in which the nodes consume and/or emit audio files, with both types of nodes continuously looking for ways to deepen interactions, which in aggregate amounts to an enormous commercial value.
Until next time!
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