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In Focus: Spotify Technology

Thanks for checking out this week's In Focus, a look into a company, companies, or markets that made Wall Street's news cycle. This week I bring Spotify in focus.

Wall Street and Main Street have a problem, a bias for words. Words that when spoken or heard flips a switch and causes both streets to over value or over reach on investments.

We experienced this two years ago in the middle of Bitcoin's run to $19,000 when "Blockchain" became the buzzword of the time. The Long Blockchain Corporation (LBCC), formally known as Long Island Brand Beverages was a struggling beverage company. After their press conference when they announced the name change to the Long Blockchain Corporation the company's stock exploded from $2.44 per share to a high of $9.49. The stock currently trades at $0.31.

That was an extreme example, but many companies during that time received a bit more attention than they deserved by incorporating "Blockchain" in their name or tagline.

"Technology" is another one of those buzzwords. Add the word technology to a company's name and it adds a little bit of something to a company's profile, and I believe Spotify Technology is currently benefiting from this.

What Tech Implies

When investors see 'Technology' attached to a company's name we make assumptions. We assume - especially if the company in question is considered a tech company - that the company is capable of continually creating tech and leveraging that tech to its benefit.

Continually is the key word in that last sentence. Spotify (SPOT) has done a great job with their algorithms. At one point or another I've subscribed to Rhapsody, now known as Napster, Amazon Unlimited, Google Play, Spotify, Tidal, and Apple Music. Spotify was/is the best at curating new music for me to listen to, and not just finding new music, but new music I would end up liking enough to add to my own playlists. Because of Spotify's algorithms artist I didn't know existed on Thursday I become big fans of by Friday evening.

But what's next? Where is the other technology? What else does Spotify have to offer? I've always seen two roads ahead for Spotify, and neither one of those were streaming music exclusively.

The first road was in addition to streaming music they would create mobile games that are centered around music. These apps would be another source of ad revenue and push the users to Spotify. The other road I pictured for Spotify was that they would clean up their balance sheet, lower their debt load, and make themselves a takeover target.

SPOT Q2 2019, It Wasn't Bad

Spotify's recent quarterly earnings report for Q2 2019 wasn't a bad one. The company reported €1.6 billion in revenue, almost 32% higher than Q2 2018, and Ad supported revenue came in at €165 million, which was higher than the €154 million estimate. Spotify also reported 108 million premium users, which was right in the middle of what the company expected, but the company still reported a net loss. Revenue for Q3 is expected to be €1.7 to €1.9 billion, which if they hit on the low end would still represent 30% y/y revenue growth. Spotify isn't a bad company, they're just in an unfair fight.

A Slingshot and a Stone

The two major names in music streaming are Apple and Spotify, but it's an industry that many are involved in. Tidal and Napster are streaming, Google (GOOGL) has YouTube Music and Amazon (AMZN) has Amazon Unlimited. Then there are the dozens of streaming services that we don't hear about regularly. Did you know there are streaming services just for the classic music listener?

Spotify vs Apple, Spotify vs Amazon, Spotify vs Google, Spotify vs Tidal, Spotify vs Napster. If this were a fight of pure play music streaming service vs music streaming service, I'd likely pick Spotify, but it's not. Apple, Amazon, and Google do other things, music is a hobby to those companies, while Spotify is all in on just music. Spotify is fighting tech giants with a slingshot and a stone, and that's a tough battle to win.

Ultimately Spotify needs to add some additional tech to their offering, because music streaming on its own will get them but so far, which I believe is where the stock is now.

What Would I Do?

If I owned Spotify I would Hold it, I wouldn't add to my position. I like the company, I like the battle they've put up so far, but I think they are overmatched. There were talks of Spotify signing artists directly to Spotify, something I didn't touch on in this article. That idea along with some other moves could help the company reach profitability and be a major player in tech, but operating as a record label isn't the sole kicker to make Spotify profitable or a major player.

But I'm keeping an eye on Spotify, just in case they decide to add some additional tech or even tech related investments to what they're already doing.

This is where I leave you. Thanks again for checking out this week's In Focus.


What is The Seville Report

The Seville Report is our attempt to bring world class investment research to people who feel world class investment research isn't available to them. We also want to demystify the stock market for people who wouldn't normally think of putting their money in the stock market. Our research comes quarterly via our newsletter, The Seville Report. We use the website and this blog to share thoughts and ideas about the markets and different companies.

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