2022 was tough for audio-streaming kingpin Spotify (NYSE:SPOT). Spotify stock has lost its footing in a major way, falling by around 80% from peak to trough. In 2021, it was hard to even imagine such a dominant industry player suffering a massive decline. As Spotify takes its battle with Apple (NASDAQ:AAPL) for audio-streaming supremacy to the next level, the market thinks it’s Spotify that stands to lose.
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Indeed, it’s a battle between David and Goliath, and right now, Goliath looks to have a bit of the upper hand. Even if the worst of margin pressures are behind Spotify, the environment remains unhospitable. I remain neutral on SPOT stock.
Spotify may not have the bundling powers of Apple. Further, it could prove difficult to differentiate itself from rival streamers. In any case, I don’t view streaming as a winner-takes-all market. There’s a lot of room for innovation over the next few years. Given this, there are a lot of angles Spotify can take to reignite growth.
With 2022 over, all eyes will be on how Spotify plans to regain its footing to move higher. Undoubtedly, the firm has been clashing with tech titan and bitter rival Apple over the past few years now, and in recent weeks, the Swedish streamer has been calling for regulators to take more action on Apple over “unfair” practices.
Whether or not regulators answer Spotify’s call, Spotify needs to do everything within its power to put itself in a better spot (pardon the pun!). Fortunately, I think it has levers it can pull over the coming years.
Apple’s Service Bundle Has Been the “One” for iPhone Users
Undoubtedly, Apple’s Apple One bundled service subscription includes its music-streaming service Apple Music alongside various digital offerings. With news, video streaming, cloud storage, fitness, mobile games, and a growing lineup of other services (let’s not forget about iCloud+) all together in a nice package, Apple still boasts one of the most impressive and value-rich service bundles that most rivals cannot stack up against.
Even after Apple’s recent service price increases, it still has the bundle that makes the most financial sense for those within the Apple ecosystem. Looking ahead, I think Apple’s ongoing services push could apply even more pressure to digital service providers like Spotify that don’t have the bundling advantages.
Undoubtedly, Apple has been known to keep its best features and services to those who own its devices. Apple Music and other services work best on an iPhone, iPad, or Mac. By not catering to non-Apple users, though, the firm essentially closed the door on a pretty sizeable market.
Looking ahead, Apple seems ready to take its services business to the next level by offering to users that may lie outside its ecosystem.
The tech giant recently opened up its doors wider to Windows users, with TV and Music apps now available on the Microsoft (NASDAQ:MSFT) operating system. Further, Apple Music is now available for Xbox gamers to jam out to their favorite tunes.
Indeed, Apple services aren’t solely for Apple users anymore. By opening up the doors, Apple’s services stand to gain a lot, perhaps at the expense of other service providers like Spotify. In addition, non-Apple users who enjoy polished services like Apple Music may even consider switching to iPhone come upgrade time. Indeed, Apple has a lot to gain by offering its services to the world.
The playing field isn’t too even for the likes of Spotify as bundlers double down in the face of an economic downturn. In a prior piece, I suggested that Spotify acquire its way to a bundle, but even without an acquisition or merger, Spotify still has tools to help it turn the tides back in its favor.
Potential wildcard advancements in AI could act as longer-term tailwinds for the audio-streaming industry. With a treasure trove of user data and plenty of algorithms that know how to personalize the listening experience for users, I’d look for Spotify to look to really start to flex its AI muscles to help differentiate itself.
Is Spotify Stock a Buy, According to Analysts?
Turning to Wall Street, SPOT stock comes in as a Moderate Buy. Out of 19 analyst ratings, there are 10 Buys and nine Holds.
The average Spotify price target is $114.44, implying upside potential of 14.4%. Analyst price targets range from a low of $87.00 per share to a high of $175.00 per share.
The Takeaway
As the year progresses, it’s important for Spotify to make progress on the margin front (last quarter’s gross margins stood at a mere 24.7%). It’s what the market wants in a higher-rate world, after all.
Streaming is not known for bountiful margins, and management stated that 2022 could see the worst for ad gross margins. Pressure on the ad business and hefty expenditures (think contract renewals) are notable margin dampeners Spotify will be moving on from. It will be interesting to see how Spotify can improve profitability prospects while continuing to invest in initiatives to stand out from the pack.
