Where will Spotify be in 5 years?
IIf you’ve been in the stock market for a while, you’ve probably heard that it’s better to be a long-term investor. But what does investing for the long term really mean?
Every person has a unique perspective, but for me that means investing with the goal of owning a stock for at least five years. If you buy something today, your time horizon for the investment should be at least until early 2027.
A stock with great potential is Spotify (NYSE: SPOT), the global music and audio streaming platform. Shares are down more than 50% year-to-date (YTD), even though the company looks pretty healthy, potentially providing a buying opportunity for investors. Long term, let’s see where Spotify’s business might be in early 2027 and what that might mean for the title.
Will Spotify reach 1 billion users?
Spotify runs an audio streaming service where users have access to the global catalog of music and podcasts, mostly for free. On top of that, it offers an ad-free music listening experience for a monthly subscription, with prices that differ across the world.
At the end of the first quarter of 2022, the company had 422 million monthly active users (MAUs), growing 19% year-over-year. Eventually, the company aims to have more than one billion MAUs worldwide. With Spotify being the leading audio service in the majority of markets except China, and music/audio enjoying such popularity around the world, I think that’s an achievable goal.
Could Spotify reach 1 billion MAUs by 2027? To do so, it would need to maintain its current annual growth rate of 19% for the next five years. That might be a bit of an aggressive projection, but even if Spotify “only” grows MAUs by 15% per year, it will have 850 million subscribers by Q1 2027.
Currently, 43% of Spotify’s MAUs subscribe to its premium music service. If this ratio holds, the company should have around 430 million premium subscribers once it hits 1 billion MAU. With a current average monthly revenue per user (ARPU) of $4.72, that would equate to $24.3 billion in annual recurring revenue from the premium segment.
Over the past few years, Spotify has invested heavily in podcast content, distribution tools, and technology. Thanks to these investments, he is today the most popular podcast player in many markets, dethroning the historical leader of the Apple Podcasts. This will help Spotify get even more MAUs globally, some of which will result in premium subscribers.
In addition to the benefits for the premium business, Spotify directly monetizes podcasts with its dynamic new advertising network called Spotify Audience Network (SPAN). You should think of it as YouTube (which is part of Alphabet) advertising but with audio, allowing podcast hosts to easily make money from advertising without having to contact advertisers directly. Of course, Spotify keeps a share of all these expenses as revenue.
In the first quarter of 2022, Spotify’s advertising revenue increased 31% year-over-year to $304 million. Over the past 12 months, it has generated $1.37 billion in advertising revenue, with much of the growth coming from the launch of SPAN just over a year ago. With the podcast industry expected to grow at a rate of 27.5% through 2027, Spotify should be able to ride this tailwind and generate sustainable growth for its advertising segment.
With an expected 30% annual revenue growth rate, Spotify could generate $5 billion in advertising revenue if it can continue to deliver on its podcast ambitions.
New audio formats
Spotify has a lot going for it right now. Not only is it aggressively trying to win in streaming music and podcasts, but it looks like it wants to expand into audiobooks and live audio as well.
In 2021, he bought the Lockerroom live audio chat app, which is now rebranded as Spotify Live. Popular podcast hosts do live broadcasts on the app, which can then be listened to on their podcast feeds. The app hasn’t had much success yet, but should add to Spotify’s podcast ambitions.
With audiobooks, Spotify hasn’t made any moves on the consumer front, but has recently acquired a popular distribution platform called Findaway. In a press release, Spotify management said it plans to “revolutionize the audiobook space like we did with music and podcasts,” but gave no details on its plan. Still, we know that support is part of its long-term strategy.
It’s unclear how Spotify plans to monetize both audiobooks and live audio, but it does offer a potential upside in the form of shareholder options. By 2027, we should know more about the details of its long-term ambitions.
What does this mean for shareholders?
Combining the projections for the premium and advertising segments, Spotify could achieve approximately $30 billion in annual revenue by 2027. Through leverage in the premium business and scaling advertising per podcast, management believes it can eventually achieve gross margins of 30% or more. If it can achieve 30% gross margins by 2027, the company could make an annual gross profit of $9 billion. And that’s without considering the added benefits of audiobooks or live audio.
Given how much Spotify likes to reinvest for growth, we don’t know how much of that projected gross profit will go back to bottom line. But with a current market capitalization of only $22 billion, I think the stock price would be much higher than it is today.
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Suzanne Frey, an executive at Alphabet, is a board member of The Motley Fool. Brett Schafer holds positions in Spotify Technology. The Motley Fool has positions in and recommends Alphabet (A shares), Alphabet (C shares), Apple and Spotify Technology. The Motley Fool recommends the following options: $120 long calls in March 2023 on Apple and short calls $130 in March 2023 on Apple. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.