We recently compiled a list of 10 Best Internet Content Stocks to Buy. In this article, we will look at where Spotify Technology S.A. (NYSE:SPOT) ranks among the best internet content stocks.
According to Grand View Research, The global digital content creation market value stood at $25.6 billion in 2022 and is projected to grow at a CAGR of 13.5% from 2023 to 2030. In 2023, North America dominated the digital content market. The primary drivers are the increasing use of social media and the digital change occurring across different industries. According to a study by Kepios, 62.3% of individuals in the entire globe use social media. As of April 2024, the average daily usage is 2 hours and 23 minutes per this study. Kepios analysis reveals that the number of people using social media grew meaningfully during the first three months of 2024, and annual growth rates are still significantly more than 5%.
Content creation is also being transformed by artificial intelligence. According to Custom Market Insights, the global market for AI-powered content creation was valued at $2.3 billion in 2024 and is projected to grow at a compound annual growth rate of 7.7% to reach USD 7.9 billion by 2033. Moreover, AI programs like GPT-4 are being used to generate graphics, music, and text. Gartner projects that 30% of all digital content will be artificial intelligence generated by 2025. This facilitates hyperpersonalization, which allows material to be personalized to specific consumers while also streamlining the content creation process.
Secondly, the popularity of short-form video material is skyrocketing, emerging as a major trend in the content production industry. Platforms like Instagram Reels and TikTok have paved the way for this movement. In 2024, 85% of marketers anticipate short-form videos to be the most successful type of social media content, according to a HubSpot survey. The snackable aspect of this format makes it ideal for grabbing the attention spans of increasingly transient internet consumers.
Thirdly, digital content is projected to become more interactive in the future. Advancements in virtual reality (VR) and augmented reality (AR) are opening up greater opportunities for immersive experiences. The AR and VR market is expected to reach $1.5 trillion by 2030, according to a PwC report.
If we take a broader view, according to the PWC’s Global Entertainment & Media Outlook 2024-2028, there are a number of significant growth prospects in the industry, which is expected to reach US$3.4 trillion by 2028. Notwithstanding persistent upheavals and the necessity of reinventing company models, the industry presents substantial income opportunities. Growth is anticipated to be driven by advertising, with spending forecast to reach US $1 trillion by 2026 because of connected TV and internet advertisements. Due to market saturation, streaming services are being forced to investigate ad-supported business models and creative content. Revenues from gaming are predicted to surpass $300 billion by 2028, particularly in Asia Pacific. The industry is still thriving. Companies navigating shifting market dynamics will find more opportunities in high-growth regions and market categories.
Methodology:
We sifted through holdings of Internet Content ETFs and online rankings to form an initial list of 20 Internet Content stocks. Then we selected the 10 stocks that were the most popular among institutional investors. The stocks are ranked in ascending order of the number of hedge funds that have stakes in them, as of Q2 2024.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here)
Spotify Technology S.A. (NYSE:SPOT)
Number of Hedge Fund Investors: 88
By the end of 2023, Spotify Technology S.A. (NYSE:SPOT), which has its headquarters in Stockholm, Sweden, will have 602 million active monthly customers, making it one of the biggest music streaming services globally. The company makes revenue from its users using two different models: an ad-supported service and a premium service that requires a paid subscription. The percentage of Spotify’s total revenue in 2023 that came from premium and ad-supported services was 86% and 14%, respectively.
It is anticipated that rapidly expanding digital streaming will emerge as the preferred primary distribution medium in the constantly evolving music industry. Spotify can gain from several network effects that will enable it to acquire more users and more intangible assets linked to user information and listening habits. However, as per Morningstar analysts, it has a highly unpredictable cost structure that might restrict its capacity to operate profitably and leverage future operating leverage, and it confronts fierce competition from massive digital platforms with more resources.
Rowan Street Capital stated the following regarding Spotify Technology S.A. (NYSE:SPOT) in its Q2 2024 investor letter:
“Back in our 2022 year-end letter, we highlighted Spotify Technology S.A. (NYSE:SPOT), which was trading at roughly $15 billion at the time. We asked the question: “Does this valuation make any sense?” Now, just 18 months later, Spotify is valued at about $68 billion — a 4.3x increase. To put this in perspective, we initially estimated a valuation of about $70 billion by 2025, and it seems we got there a bit faster than anticipated. Spotify went public in 2018 at a price of $132 per share. We began purchasing shares that same year and continued to add to our position as the stock appreciated.
Today, Spotify trades at $337 per share, reflecting a total return of 155% since its IPO, or about 16% annually — quite a respectable performance. However, our average cost basis is $216, as we increased our position as the stock rose. As a result, the stock return from that cost basis stands at 58%. While it’s somewhat disappointing in comparison to the overall gain since the IPO, we remain confident in the position we’ve built, given the company’s strong long-term growth and profitability potential…” (Click here to read the full text)
On the other hand, Baron Focused Growth Fund stated the following regarding Spotify Technology S.A. (NYSE:SPOT) in its Q2 2024 investor letter:
“Spotify Technology S.A. (NYSE:SPOT) is a leading global digital music service, offering on-demand audio streaming through paid premium subscriptions and an ad-supported model. Shares of Spotify were up, largely attributable to impressive beats in gross margin and operating margin as well as the announcement of subscription price hikes. Given the strong value proposition of the product, Spotify is beginning to exercise its pricing power following last year’s initial price increases that saw minimal churn. Users continue to grow at a healthy pace despite the pricing impact. Spotify also continues to innovate on the product side, with early trials of generative AI features and the addition of new verticals like audiobooks, which have seen solid early adoption. On the cost side, Spotify is on a path to structurally increase gross margins, aided by its high-margin artist promotions marketplace, increasing contribution by its podcast division, and growth of the margin-accretive advertising business. We still view Spotify as a long[1]term winner in music streaming with potential to reach more than one billion monthly active users.”
Stephen Mandel’s Lone Pine Capital is the largest stakeholder in the company from among the funds in Insider Monkey’s database. It owns 1,687,415 shares worth $529.49 million as of Q2.
Overall SPOT ranks 7th on our list of the best internet content stocks to buy. While we acknowledge the potential of SPOT as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than SPOT but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published on Insider Monkey.