Whilst my own modelling inputs were quite similar to yours, 3 thoughts come to mind:
1 - A lot of MAU growth is coming from their ROW segment, which presumably will keep ARPU low over the next few years
(on a similar note, Premium MAU's in the ROW segment has fallen to +14% in Q3 YOY - that's the slowest growth as far as I can see.)
2 - From possibly now outdated research, music streaming looked to be very region specific; there were large players in South Korea and India that I had never heard of. Is the music streaming business more saturated than we realise?
3 - I didn't quite follow the P/E comparisons with Amazon et al. If we use the midpoint of Spotify's 2030 figures from our similar workings, the IRR over the next 5 years probably comes in at <5%. That seems expensive to me.
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For full disclosure I used to hold Spotify, but sold out on valuation grounds last year.
It's probably worth adding that I'm a big user of the service and if I was forced to cancel all of my subscriptions, Spotify would be the last to go - me, and my family, use it all the time.
Thanks for the thoughtful comment, responses to your points:
1. You're directionally right and I reference that in the analysis. ARPU is pressured by mix change, supported by price increases and other uplifts. MAU growth in general, and premium, are both growing their slowest ever because of the larger base. Is the slowest growth also in terms of absolute numbers?
2. It is regional, however they've been gaining share from regional players and speak about it on their Q2 or Q3 call, and believe that this will continue going forward due to a better competitive position.
3. The P/E discussion is a thought exercise on what is their comparable cohort as well as what multiple would you be willing to pay for a company that as you testified, would be the last thing to cancel. IMO Amazon is one of those consumer companies.
Thank you for taking the time to post this. This is a great analysis and a very thorough writeup.
The framework you used to get to your numbers seems reasonable, and obviously there's a ton of hypotheticals one could get into.
One point of "pushback" (food for thought) is on the multiple. At €6B of EBIT (effectively EBITDA) with a TAM that would seem to be well penetrated with 1B users, should the incremental EBITDA $s be valued at 20-30x EBITDA 5 years out?
If SPOT revenue growth is < 10%/yr at that point and decelerating, 20x seems too high (ADBE has some existential narrative concerns due to AI but they're hitting the < 10%/yr wall + decelerating and are trading < 15x EBITDA).
On the other hand, to your point, SPOT should generate a tremendous amount of FCF, and your analysis as you note gives them little credit for redeploying this in other adjacent ways to grow the business or simply return to shareholders.
I only recently began digging into SPOT, but key for me (in addition to many of the things you identified are two fold): 1) diving deeper into the relationship between the labels and SPOT (you touch on this but given the concentration, understanding this relationship is a critical part of the investment thesis); and 2) understanding the extent to which SPOT can become a "multiple trick pony" to some degree as AMZN, AAPL and MSFT have.
Not to suggest that SPOT should attempt to move into a completely different industry or vertically integrate as NFLX has, but it seems that as the industry becomes more mature SPOT may need to lean on other levers to maintain the incremental degree of long term growth as implied by its valuation.
Great comment and thanks for reading. You're touching on an excellent point and I think that in 5 years out SPOT still has 5-10 years of quality growth ahead of it. Subscribers, both premium and paid should increase, price hikes should be relatively steady over time and a myriad of new businesses give room for further growth. Together, a ~5-8% revenue growth rate for the next 10 years seems very reasonable, which would translate into a higher EPS or FCF/share growth rate (~12%) and given that, a 30x multiple is also perfectly reasonable. Essentially I think a high multiple is legitimate because Spotify has very predictable revenue even far into the future.
TBH I'm not sure strategically what they pivot into in 7 years (beyond merchandise, live music, audiobooks, educational content) - but part of my evaluation of management is that they're good stewards of capital and will find something to do with the capital, or simply start massively buying back shares.
Thanks for the post - most interesting.
Whilst my own modelling inputs were quite similar to yours, 3 thoughts come to mind:
1 - A lot of MAU growth is coming from their ROW segment, which presumably will keep ARPU low over the next few years
(on a similar note, Premium MAU's in the ROW segment has fallen to +14% in Q3 YOY - that's the slowest growth as far as I can see.)
2 - From possibly now outdated research, music streaming looked to be very region specific; there were large players in South Korea and India that I had never heard of. Is the music streaming business more saturated than we realise?
3 - I didn't quite follow the P/E comparisons with Amazon et al. If we use the midpoint of Spotify's 2030 figures from our similar workings, the IRR over the next 5 years probably comes in at <5%. That seems expensive to me.
---
For full disclosure I used to hold Spotify, but sold out on valuation grounds last year.
It's probably worth adding that I'm a big user of the service and if I was forced to cancel all of my subscriptions, Spotify would be the last to go - me, and my family, use it all the time.
Thanks again for sharing your analysis.
Thanks for the thoughtful comment, responses to your points:
1. You're directionally right and I reference that in the analysis. ARPU is pressured by mix change, supported by price increases and other uplifts. MAU growth in general, and premium, are both growing their slowest ever because of the larger base. Is the slowest growth also in terms of absolute numbers?
2. It is regional, however they've been gaining share from regional players and speak about it on their Q2 or Q3 call, and believe that this will continue going forward due to a better competitive position.
3. The P/E discussion is a thought exercise on what is their comparable cohort as well as what multiple would you be willing to pay for a company that as you testified, would be the last thing to cancel. IMO Amazon is one of those consumer companies.
Thank you for taking the time to post this. This is a great analysis and a very thorough writeup.
The framework you used to get to your numbers seems reasonable, and obviously there's a ton of hypotheticals one could get into.
One point of "pushback" (food for thought) is on the multiple. At €6B of EBIT (effectively EBITDA) with a TAM that would seem to be well penetrated with 1B users, should the incremental EBITDA $s be valued at 20-30x EBITDA 5 years out?
If SPOT revenue growth is < 10%/yr at that point and decelerating, 20x seems too high (ADBE has some existential narrative concerns due to AI but they're hitting the < 10%/yr wall + decelerating and are trading < 15x EBITDA).
On the other hand, to your point, SPOT should generate a tremendous amount of FCF, and your analysis as you note gives them little credit for redeploying this in other adjacent ways to grow the business or simply return to shareholders.
I only recently began digging into SPOT, but key for me (in addition to many of the things you identified are two fold): 1) diving deeper into the relationship between the labels and SPOT (you touch on this but given the concentration, understanding this relationship is a critical part of the investment thesis); and 2) understanding the extent to which SPOT can become a "multiple trick pony" to some degree as AMZN, AAPL and MSFT have.
Not to suggest that SPOT should attempt to move into a completely different industry or vertically integrate as NFLX has, but it seems that as the industry becomes more mature SPOT may need to lean on other levers to maintain the incremental degree of long term growth as implied by its valuation.
Great comment and thanks for reading. You're touching on an excellent point and I think that in 5 years out SPOT still has 5-10 years of quality growth ahead of it. Subscribers, both premium and paid should increase, price hikes should be relatively steady over time and a myriad of new businesses give room for further growth. Together, a ~5-8% revenue growth rate for the next 10 years seems very reasonable, which would translate into a higher EPS or FCF/share growth rate (~12%) and given that, a 30x multiple is also perfectly reasonable. Essentially I think a high multiple is legitimate because Spotify has very predictable revenue even far into the future.
TBH I'm not sure strategically what they pivot into in 7 years (beyond merchandise, live music, audiobooks, educational content) - but part of my evaluation of management is that they're good stewards of capital and will find something to do with the capital, or simply start massively buying back shares.
Amazing breakdown and analysis. Just restacked.
Thanks! Greatly appreciate the feedback and restack