Spotify (SPOT) stock has been stuck in a slump for well over a year now. Despite the competitive pressures, though, Spotify has been able to defend its turf quite well, thanks to innovative thinking from an exceptional management team.
With the past few weeks of strength, shares of SPOT finally look ready to break out of its year-long funk. This could come on the back of an incredible third-quarter earnings result and a huge vote of confidence in the form of a “top pick” rating from Morgan Stanley.
Undoubtedly, audio streaming has become quite crowded as of late. With strength in exclusive podcasts, though, the company no longer has a commoditized product. If anything, streaming rights to very popular folks like Joe Rogan have formed a bit of moat on the streaming giant that could retain its lead in the space, even as big tech attempts to steal its lunch with its deep pockets.
I think Morgan Stanley analysts are right on the money. Spotify stock is a great buy at current valuations, with many levers it can pull to keep the competition at bay while it gives its margins a bit of a boost.
As such, I am bullish on Spotify stock. (See today’s best-performing stocks on TipRanks)
A Magnificent Third Quarter That Could Sustain a Rally to New Highs
Spotify really blew away the numbers in Q3, with MAUs (Monthly Active Users) surging to 381 million, up 19% year-over-year. There was strength across the board, but the growth in the Asian segment was most intriguing.
Indeed, Spotify still has a world of growth opportunities with its premium subscription and free services. The latter is not only a good source of ad revenues (Ad-Supported rose 75% for the quarter) but serves as a magnificent onramp for listeners who may not yet be able to afford another subscription. On the revenue front, Spotify saw an impressive 27% in year-over-year growth to $2.9 billion.
With the podcast business picking up traction, many free users and listeners that are subscribed to rival services may have the nudge they need to make the jump to Spotify Premium.
Undoubtedly, the reaction to Spotify’s big beat was very positive, propelling shares off the low-$200 range towards the $300 mark. Despite the impressive run, SPOT stock still looks to have room to run. The incredible quarter may very well support a continuation of this rally towards new highs.
Competitive Pressures Remain Biggest Risk to Spotify’s Growth Story
With Apple (AAPL) Music picking up serious traction with Apple consumers, Spotify may have a more challenging time keeping its growth rate elevated. The Apple One bundle, which includes Apple Music alongside a wide range of other services, such as gaming, video, news, and cloud storage, offers a value proposition that’s really hard to match.
Spotify views Apple as a top threat. That’s a significant reason why Spotify was no fan of the Apple One bundle. While Spotify can’t match such a bundle (yet), I do think that Spotify must continue spending considerable amounts on exclusive content. This is because it’s unlikely to win a pricing war with the likes of Apple and its extensive line of services.
Audio streaming may be viewed as more commoditized than video streaming. After all, odds are that your favorite musicians have their tracks available on many audio-streaming platforms. To differentiate itself, Spotify made a move into podcasts and video.
As the company begins putting more money on such content, diversifying itself away from just music, I think it could keep its growth alive over the next decade and beyond.
At the end of the day, many tech titans are bound to clash across a wide range of industries. Eventually, the lines separating audio, video, gaming, and even the metaverse content will blur. The company that can provide the best mix of content across a broad range of categories will be able to generate impressive results for its investors.
Spotify has made a magnificent move into audio exclusivity with its podcast push. Expect Spotify to beef up its audio business, as it looks to invest heavily into video, a streaming area that could help Spotify really solidify its moat.
Wall Street’s Take
Turning to Wall Street, Spotify has a Moderate Buy consensus rating, based on 11 Buys, four Holds, and two Sells assigned in the past three months. The average Spotify price target of $318.57 implies 10.5% upside potential.
Analyst price targets range from a low of $200.00 per share to a high of $385.00 per share.
The Bottom Line
For now, Spotify will be in full-on investment mode as it looks to differentiate itself, but that doesn’t mean competitive threats should be discounted.
Apple is not only pressuring Spotify on prices, but it’s also beefing up its service. With spatial and lossless audio, a push for exclusive podcast subscriptions, and the under-the-radar acquisition of classical music streaming firm Primephonic, Spotify doesn’t have much room for error.
If Spotify is to grow its margins amid such competitive pressures, it needs to produce much-listened-to content. Continued M&A in audio and video may be the way to go, as rivals look to acquire their way to win customers.
Disclosure: Joey Frenette owned shares of Apple at the time of publication.
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