Spotify is headquartered in Stockholm in Sweden but it trades its shares in the New York Stock Exchange under the ticker SPOT through Spotify Technology S.A., a domiciled holding company based in in Luxembourg, and in the form of American depositary receipts. It operates several subsidiaries for operational efficiency, tax optimization, regional legal and regulatory compliance, and content acquisition. It also has a 9 percent stake in Tencent Music Entertainment. This article explores and discusses the advantages and disadvantages of Spotify stock.
Adding a Music Streaming Giant in Your Playlist: Advantages and Disadvantages of Spotify Stock
Pros: Spotify Stock Advantages
The World Economic Forum named Spotify a Technology Pioneer in 2011. The Swedish audio and media streaming services provider and platform also qualifies as a tech company because of how it uses technology to provide services and drive consumer experience.
Nevertheless, founded in 2006 in response to the rampant music piracy that was plaguing the recording industry, the platform has been recognized by some for its contribution to offering a lawful means to combat illegal downloading and sharing of music.
It now has over 600 million monthly active users which include more than 230 million paying subscribers from across the world. The platform earns ad revenues from its non-paying subscribers. The following are the advantages of investing in Spotify stock:
• Freemium Business Model: The company generates revenues from advertisements and paid subscriptions via a freemium business model. It sells ad placements to third parties to enable access to its ad-supported free plan and tiered paid plans to users who do not want ads. This allows the company to maximize its user reach and revenue potential.
• Further Growth Potentials: One advantage of Spotify stock is that it has not maximized its user base. Most of its users are in the U.S. and Europe. There is an opportunity to expand further to countries in South America, the Middle East, and Southeast Asia and the Pacific through marketing, key partnerships, and local content catalog expansion.
• Increasing Earnings Further: There are also other avenues to increase its earnings. It can focus on growing its premium subscribers through incentivization like offering exclusive content and higher audio quality options. It can also optimize its advertising revenues through targeted ads or better user experience for users under the free ad-based plan.
• Exclusive Content Expansion: Another opportunity for Spotify is the further expansion of its exclusive content catalog like music, podcasts, music videos, and talk shows. It can transform itself into a multimedia streaming platform that can compete not only against other music streaming service providers but also video streaming platforms.
• Growth Company Potential: Spotify is considered neither a growth stock nor a value stock in the most technical definitions. There are still signs that it can become a full-fledged growth stock once it taps into its growth potential and increases further its revenues and profits. Investing in Spotify stock means betting on it becoming a growth stock.
Cons: Spotify Stock Disadvantages
It is worth noting that there are several music streaming platforms available. Amazon has Amazon Music and Apple has Apple Music. Even Google has YouTube Music. The market for music streaming services has become increasingly competitive.
Several record producers and artists have also criticized Spotify due to its royalty structure. Some artists tend to either withdraw some of their works from or delay their major single album releases on the platform due to what is deemed as unfair compensation.
The company is also struggling to enter mainland China and gain a substantial foothold in other geographic markets outside the United States and Europe. There are also concerns about market saturation. Below are the disadvantages of investing in Spotify stock:
• Challenges From Competition: The competition in the audio streaming market creates several challenges for the company. These include increasing the bargaining power of the consumers which prevents it from increasing its prices, forcing it to spend more on marketing and expansion pursuits, and creating short-to-medium-term market saturation.
• Unstable Financial Performance: Another notable disadvantage of Spotify stock is that its historic financial performance has been inconsistent and unstable. The company had a recorded revenue of €13.25 billion in 2023 but its net income was at negative €532 million. The company has struggled to consistently turn a profit due to its high expenditures.
• Notable Operating Expenses: Running and maintaining the platform has proven to be both challenging and expensive. The company has incurred high costs. Most of these costs from paying royalties to artists and producers, marketing campaigns to attract and retain users, and upfront costs centered on several global expansion investments.
• Expensive and Volatile Stock: The stock price of Spotify has seen medium-term volatility. It traded at around $150 per share in the Q1 of 2020 and experienced an increase at around $330 in the Q1 of 2021 before dipping to below $250 in the Q1 of 2022 and below $170 in 2023. The stock price once again rallied to above $300 in Q2 of 2024.
• Current Financial Priorities: Spotify currently prioritizes growth and further expansion over profits. This means that it prefers to invest a substantial portion of its revenues and the capital it has raised from the capital markets or investors into marketing, content acquisition, and technological advancements. This can lead to delayed profitability.