Spotify: A 100-Bagger in the Making.

Q4 2024 Update

Edited by Brian Birnbaum and an update of my original Spotify thesis.

As I predicted years ago, Spotify is becoming a cash machine. Spotify’s organizational focus on accelerating execution for 2025 promises to meaningfully enhance financial performance.

Over the long term, Spotify is poised to become a far bigger company that conventional analysts can fathom.

Spotify’s free cash flow yield has exploded over the last twelve months, per the graph below. In Q4 2024 gross margin and free cash flow came in at record levels, at 32.2% and €877M, respectively. The trend in the graph below is shocking even to someone like me who expected as much. But I believe this is just the beginning. As Spotify continues growing its subscriber base and figures out new ways to solve problems for them, financials are set to proliferate all over again throughout the coming decade.

My investment has already 6X’d, yet I see a path to 10X and beyond from here over the coming years. While many investors still see Spotify as a music app, they fail to see the bigger picture. Now one of the largest platforms on the internet, Spotify is on its way to becoming a world-class business of Amazonian proportions.

Spotify has gone from being a great app to an extraordinary business. On the surface their success can be attributed to the progressive deployment of audio verticals beyond music and an unwavering focus on cost optimization. And yet, like all of the world’s best companies, their ability to execute the above depends upon a core motive to delight end customers.

Also the case for companies with extraordinary process power, Spotify’s management isn’t able to pinpoint any specific driver of the company’s financial outperformance. During the Q4 2024 earnings call CEO Daniel Ek alluded to a stream of constant innovations:

We set quarterly record highs for revenue, gross margin, operating income, and free cash flow as we closed out our first full year of profitability.

So what drove this growth?

Well, in large part, it's the result of countless improvements and tweaks we made over the past two years and continuous system of innovation that has brought us to where we are today.

People don’t obsess over and iterate upon the same projects and products unless they’re deeply motivated. Money isn’t enough to sustain such levels of focus and dedication. If it were, Ek’s billions would have already translated into a near-total deflation of incentive and drive. He could easily set-and-forget a stock sale plan and milk his veritable music monopoly for all it’s worth.

No, those motivated above all by money never even reach the level of achievement attained by Ek and his ilk. To start a successful business is to sign up for an ultramarathon. Every step is more grueling and important than the last. To take that next step requires increasingly intrinsic motivation. Leaders like Ek build a culture of people who buy into the same reason for being. Spotify is essentially a machine that can be trusted to attain its operational goals.

2023 was the year of efficiency and 2024 was the year of monetization. In both years, Spotify demonstrated its world class capabilities as an organization. In none of the quarterly conference calls during this period can management pinpoint any specific driver of their outperformance. In a rather Brownian motion, the organization simply finds a way to achieve each new set of goals.

For 2025 Spotify has set its sight on accelerating execution. In the abstract, this new operational goal is likely to amplify Spotify’s overall performance. Going forward, we’re likely to see much faster subscriber and profitability growth. Although Q1 tends to be soft for Spotify, all the necessary elements are in place for Spotify to achieve much higher gross margins and free cash flow production by the end of 2025.

Christian Luiga elegantly summed up management’s view on this topic during the Q4 2024 earnings call:

As Daniel alluded to earlier, we plan to make targeted investments in our core offerings, which may make our sequential gross margin cadence a bit more variable over the course of this year.

That said, our fourth quarter gross margin is expected to be higher than the quarter one due to seasonality.

Finally, we expect our free cash flow generation to meaningfully exceed what we generated in 2024.

It’s in Spotify’s DNA to continue investing for further growth. Apart from accelerating execution, Spotify has decided to invest in video podcasts, along with deepening the music experience on the platform. For years I’ve been talking about Spotify’s potential to increase ARPU (average revenue per user) by solving problems shared by creators and consumers. We’re seeing this manifest in real time with Spotify preparing to deliver a tailored experience for music fans.

This approach allows creators to earn more for their contribution while fans get more for their money. Music is a $2.5T industry. Given Spotify’s market share, value proposition, iterative capacity, and scale at marginal cost, it’s capable of capturing several times its market cap. As Spotify applies its strategy to subsequent audio verticals, the upside starts to look far taller than most conventional analysts can fathom.

Historically, Spotify has been focused on moving people from piracy to legal consumption. This has been enabled primarily by their freemium model, which today is the main driver of Spotify’s business. As of Q4 2024, the company has moved to a new business model, which I believe will deliver significantly higher operating leverage. Daniel EK’s remarks during the Q4 2024 earnings call were highly insightful:

The next version of the music industry, I believe, is one where we're going to tailor [the] experience of Spotify to all of these different subgroups.

One of them we've been talking about, which is the super fans. So I'm personally super-excited about this one and this is a product I've been waiting on for quite some time as a super fan of music and I'm playing around with it now and it's really exciting and I can't wait to show you guys that.

The title of my original thesis was “Spotify: the Google of Audio in the Making.” This vision has begun manifesting as Spotify deploys audio verticals beyond music with great success. The world’s perception of Spotify will evolve more and more quickly as it continues to invest in podcasts–which sets Spotify on a direct collision course with Youtube.

I believe Spotify will rival Google and emerge as one of the world’s primary search engines. While Youtube has a strong moat, Spotify has far superior organizational qualities than that of Google or any of its subsidiaries. For this reason, I believe the odds favor Spotify over the long term.

With Alex Norstrom and Gustav Soderstrom now stepping up as Chief Business Officer and Chief Product and Technology Officer, respectively, Daniel has more time to focus on the future of Spotify. I believe that Daniel is the most underrated CEO on the planet, and that this reorganization will turn Spotify into a much bigger business over the coming five to ten years. His ambition is palpable on the Q4 2024 earnings call:

And this has allowed me to spend more time working on the future of Spotify, which is where I've always believed I can have the biggest impact and we'll aim to bring Alex and Gustav to future calls to share their perspectives on our goals and performance.

My Spotify thesis has always been contrarian. The world is now witnessing their rapidly improving financials, but the market nonetheless continues to think in linear terms. Spotify is making investments to multiply its earning power over the coming decade by orders of magnitude. So long as the organizational culture remains sharp, which is likely as long as Daniel is around, the odds of astronomical success are appealing.

While my Spotify investment is up just over six-fold, I see it evolving into a 100-bagger–or more.

And if you want to learn how to identify world-class companies early as I have done with Spotify, I recommend you take my Tech Stock Goldmine course. In this course, I break down the mental model behind my 25X+ AMD and Tesla investments and my 15X+ Palantir, 6X+ Spotify and 3X+ Hims investments.

Until next time!

---

⚡ If you enjoyed the post, please feel free to share with friends, drop a like and leave me a comment.

You can also reach me at:

Twitter: @alc2022

LinkedIn: antoniolinaresc

Disclosure

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.