Investing in Spotify

Published on 05/11/22 | Saurav Sen | 9,460 Words

The BuyGist:

  • Spotify is the largest music streaming service in the world, with around 30% global market share. Spotify primarily streams music and podcasts, and is investing to expand into audiobooks and other audio content.
  • This investment thesis is for subscribers only. However, below you can see a preview of the thesis – what our subscribers get.
  • This thesis (and all our other theses) connects qualitative factors about the company’s business to specific effects on each important cash flow variable – from Revenue down to Operating Costs, and all the way to Free Cash Flow.
  • The thesis estimates “what we need to believe” to buy or hold the stock for a decent return, followed by a decision on whether to buy, hold, or sell.
  • That decision depends on the “soft” stuff that matters – competitive advantage, economic moat, management strategy etc.  Ultimately, it’s a qualitative decision.
  • Subscribers have full access to the investment thesis and our decision.
  • If you haven’t joined The Buylyst for clarity in investing, we encourage you to check out our Reasonable Pricing Plans here.

Table of Contents & Ground Rules

The point of this investment thesis is to have clarity on whether to invest in Spotify or not and, more importantly, break down exactly why. Too many people “invest” by just punting based on spurious factors such as recent price movement, superficial valuation multiples, or hearsay from peers or talking heads in media. Ultimately, it’s about decomposing the stock price into EXPECTATIONS that are baked in, and then answering the question “are these baked-in-expectations too optimistic or too pessimistic?”

Digging in – to the expectations that are baked into stock prices – takes time and effort. Most people don’t have the time or patience for this. But we love it!

Let us do the heavy lifting for you.

Here are the contents of the investment thesis:

  1. Thesis Summary
  2. Q1 2022 Earnings Report
  3. What needs to happen?
  4. Business Fundamentals
    • Competitive Advantage & Moat
    • Management Strategy
    • Growth Drivers
    • Competition
    • Other Key Risk
    • Financial Model Risk
  5. Cash Flow: Moving Parts
  6. Revenue Growth Matrix
  7. Revenue Growth: MAU Expectations
  8. Revenue Growth: ARPU Expectations
  9. Revenue Growth: Historical Context
  10. Gross Margin Expectations
  11. Fixed Costs Expectations
  12. More on Competition
  13. Valuation Summary
  14. Cash Flow Details
  15. Our previous Spotify Thesis
    • Competitive Advantage
    • Durability of Competitive Advantage
    • Management Quality

Ground Rules:

  1. Our minimum return requirement is: 50% in less than 5 years. 
  2. Based on this return requirement, we ask ourselves, “What do we need to believe about the fundamentals of the business to achieve our return requirement (or more)?”
  3. Then we answer the important question: "do we believe it?"
  4. In the Spotify thesis, we've left out the value of "real options", meaning cash flow from future business lines such as Audiobooks or Live Shows. We've implicitly assumed that their impact on Free Cash Flow will be approximately $0.

Before we dig in, here’s a free snippet from one of the sections below – do you believe this can happen? How confident are you?

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