Q4 Review and What Joe Rogan Really Means for $SPOT

Update

Reminder: my $SPOT long thesis is about the company growing to 1b+ listeners, 50m+ creators, whilst expanding its margin profile by broadening its audio mix (from music to other audio formats) and offering high margin digital services to incrementally solve problems for market participants. I also believe the company will get very smart (AI) and this will yield a huge ad network.

Q4 2021 ER Review

$SPOT posted some very reasonable earnings yesterday, but issued weak guidance in terms of MAU growth. The market did not like the latter and sent the stock down 28% after hours in a matter of minutes. $SPOT is now down 7% as I am writing this.

Before we get on with the details, the bottom line is that $SPOT´s business is doing fine and long term, it is setting up for fantastic growth, whilst the market is in hysteria mode (see $PYPL, $FB, $NFLX etc). I think this situation can persist for a year or more, which should yield plenty of opportunities to DCA in.

Creds to @ConsensusGurus

As you can see above, in the table created by @ConsensusGurus, $SPOT posted a thorough beat and there seems to be no reason for concern in terms of the underlying fundamental health of the business. Still, we need to take a step back to appreciate what is really going on:

Creds to @charliebilello

As the market bounces back and forth, $SPOT continues its long term growth story. The drivers behind this growth (cultural dominance, good management, a constantly improving AI engine) continue to solidify through time, as $SPOT consolidates its leadership in the audio space.

Neither the market´s brittleness nor cancel culture change this. About the latter, $SPOT said during yesterday´s CC: “we do not anticipate any material changes in the trajectory for net growth in MAUs and subs in 2022 when compared to the net growth we experienced in 2021.“

Further, the advances in terms of gross margin and revenue seem to be inversely correlated to stock price, as @Alex_Pitti points out (below).

Meanwhile, ad revenue climbed to 15% of total revenues for $SPOT in Q4, growing 40% YoY. The company also stated that “Q4 also saw strong performance across podcast metrics, and we've amassed highly engaged audience that is listening more than ever”. The thesis is materializing whilst the market overindulges in short term thinking.

Ek made special emphasis yesterday on getting to 50m+ creators on the platform from 11m creators today. He talks about how this will exponentiate the amount of content on the platform and how $SPOT will build out features for creators and listeners to interact - high margin digital services on top of the current infrastructure.

“The hardest thing for us oftentimes to -- is to gauge exactly when something will launch because we're always running hundreds, if not thousands, of different experiments across the platform. So I don't know which exact of these things will resonate by what time. But what I can say is that the fact that creators and consumers want to interact in new ways and that there will be lots of ways to monetize those relationships, that I don't think should be questioned.” - Ek in the Q4 CC

Ek´s remarks are consistent with my “unknown specific path” hypothesis:

In summary, $SPOT is building an ad network that will eventually rival $GOOG´s. The times call for mental strength and a clear vision.

What the Joe Rogan Incident Really Means

One way to look at the recent incident is that podcasts are making their way into the mainstream. One can argue whether the JRE pod spreads misinformation or not and what is “misinformation” in the first place / who determines it. However, it is clear that the JRE pod has made it past the early adopter pale and is now on its way to tap into the broader market.

For a long time, traditional media has dominated the space between governments and citizens, effectively having the power to shape narratives almost entirely. Now comes a media format in which it is way easier to see what people really think (podcasts), whilst the population trusts institutions and legacy media less every day. What we are seeing now is actually legacy media fighting for its seat, with the population flocking to a media format in which they feel treated like adults.

src: Axios

The recent move by Neil Young and others has been synergistically amplified by legacy media, with many outlets attempting to correlate 1:1 $SPOT´s drop in its price per share to the incident, when we all (incumbents) know it is mostly due to interest rates rising. This is the sort of tactic that incrementally leads to lower levels of trust, which in turn drives the growth of podcasts, through which it is easier to get an unedited view of the world.

The point is that this dynamic is not confined to the Joe Rogan / Neil Young incident. It is happening at many levels throughout the planet and is actually a long term trend, which is transitioning society from feeding off centralized and highly edited information sources to decentralized and unedited ones - this will also bring problems of its own. The centralized sources will not lose their relevance without a good dispute.

A higher level of abstraction also emerges in which we basically have forces in favour of censure and forces against it. The term “misinformation” is a dangerous one because it is conducive to highly consensual censure. At the core, there is no difference between saying “this is misinformation” and “I disagree with this and it should be censured”, but it sounds nicer and compounds into a very strong force at the societal level.

By definition, progress depends on ideas that are different from the official narrative and so censure is by definition against progress. $SPOT seems to be positioning itself against censure, whilst other forces are doing so in favour. This dispute will also continue through time and will affect $SPOT in uncertain ways. However, I think I have a mental model that may be effective to address this development.

Before I explain this mental model, note that I refrain from sharing my opinions on the whole COVID19 situation - this exercise is merely about getting a clearer picture of developments affecting $SPOT.

Mass Formation is a psychological phenomenon in which essentially a specific message is broadcast to a population recurrently and at a high frequency, to most often prop up an external enemy. If the population has enough free floating anxiety (sense of life being meaningless), it will rapidly find a sense in fighting said enemy. As such, the population achieves the sense of meaning it was previously craving and is now hooked.

Through this sense of meaning, the population develops rituals that further catalyze the social bonds that result from fighting against a common enemy. The sillier the rituals, the more they serve to signal a commitment to the population´s cause and the more acceptance they generate. This mechanism eventually has entire populations doing things that previously would have been unthinkable.

In history, there are many examples of mass formation at play. It is a recurring theme in modern history, which naturally emerges from the combination of modern states and modern media. The point is however, that a demographic distribution seems to emerge time and time again:

1. 30% of the population gets totally engulfed in the fight with the external enemy and grows to be highly directable through media / seems to lose the ability to think individually.

2. 30% of the population resists the phenomenon, sometimes irrationally.

3. 40% of the population goes with the majority, not really thinking about it too much.

*Interestingly, when the 30% that resist give up, the phenomenon accelerates exponentially and ends up collapsing itself.

My opinion is that over the last few years we have seen this phenomenon at work, although not necessarily with a bad intention. I also believe this is becoming a default mode for modern states, which are growing accustomed to move their populations around in this way. This also explains the decreasing levels of trust.

If this is true, the above distribution is the map to think about censure vs non-censure going forward, in terms of possible outcomes for $SPOT. Taken to the limit, we can expect 30% of $SPOT´s user base to be in favour of non censure, 40% to not care and 30% to be in favour. As such, this mental model predicts a maximum possible downside of 30% in terms of the user base, but I do not think it will ever reach this extent. After all, most people just want to listen to their stuff.

Until next time!

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These are opinions only of the individual author. The contents of this piece do not contain investment advice and the information provided is for educational purposes only and no discussions constitute an offer to sell or the solicitation of an offer to buy any securities of any company. All content is purely subjective and you should do your own due diligence.

Antonio Linares makes no representation, warranty or undertaking, express or implied, as to the accuracy, reliability, completeness or reasonableness of the information contained in the piece. Any assumptions, opinions and estimates expressed in the piece constitute judgments of the author as of the date thereof and are subject to change without notice. Any projections contained in the Information are based on a number of assumptions as to market conditions and there can be no guarantee that any projected outcomes will be achieved. Antonio Linares does not accept any liability for any direct, consequential or other loss arising from reliance on the contents of this presentation. Antonio Linares is not acting as your financial, legal, accounting, tax or other adviser or in any fiduciary capacity.