We came across a bullish thesis on Spotify Technology S.A. (SPOT) on Twitter by RadnorCapital. In this article, we will summarize the bulls’ thesis on SPOT. Spotify Technology S.A.’s share was trading at $378.88 as of Oct 18th. SPOT’s trailing and forward P/E were 153.04 and 41.32 respectively according to Yahoo Finance.
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Spotify presents a compelling investment opportunity as the dominant player in the rapidly expanding music streaming industry. The company has consistently gained market share and demonstrated its ability to implement pricing power effectively. This, combined with improving margins and cash flow, solidifies Spotify’s position as a leader in the music ecosystem. One of its key advantages is its direct relationship with customers, which allows it to better monetize its user base compared to competitors.
Insights from Universal Music Group’s recent capital markets day highlight significant untapped potential in music streaming. Global paid music penetration remains relatively low, with the U.S. at just 42%, compared to Sweden (home of Spotify) at 50%. In other developed markets, such as the U.K. and France, penetration rates are lower, around 30% and 23%, respectively, while major markets like China, Brazil, and India are even lower at just 13% or below. This leaves substantial room for growth, particularly in high-potential markets where penetration is as low as 1-3%. Additionally, current spending on music is only 50% of peak levels from the physical music era, suggesting there is still a potential doubling of revenue to reach 1999 levels on an inflation-adjusted, per capita basis.
Spotify is well-positioned to capture this growth, as it already boasts 670 million paid subscribers as of 2023, a figure that is expected to surpass 1 billion by 2028. The company’s planned introduction of a “super-premium” subscription tier further bolsters its revenue potential. This new tier, priced at 1.5 times the standard tier, will offer features like enhanced audio quality, increased user control, and exclusive content, such as early access to music and artist Q&A sessions. Notably, Universal Music Group’s discussion of similar premium tiers in the market, such as Tencent’s Super VIP tier, highlights the strong appetite among users for such upgrades, with as much as 20% of existing subscribers willing to pay more for enhanced features.
From a valuation perspective, Spotify is trading at a more attractive multiple compared to Universal Music Group (UMG). Based on forward free cash flow (FCF) expectations for 2025, Spotify is trading at approximately 23 times FCF, whereas UMG is trading at around 28 times FCF. This discrepancy suggests that Spotify, with its strong growth trajectory and expanding monetization opportunities, may be undervalued relative to UMG. Its ability to drive growth through both subscription increases and enhanced premium tiers creates multiple catalysts for future revenue expansion in the evolving music ecosystem.
Spotify Technology S.A. is also not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 88 hedge fund portfolios held SPOT at the end of the second quarter which was 77 in the previous quarter. While we acknowledge the risk and 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 timeframe. 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 was originally published at Insider Monkey.