Spotify: An Inflection Point

Q3 2023 ER Update

Edited by Brian Birnbaum and an update of my original Spotify deep dive and my Q2 update. (I cover this company quarterly and it is one of my largest positions).

Before we get started, I would be very grateful if you could please answer this survey for me. It would be of great help.

Onto the update now.

In Section 1.0 I go through my Spotify thesis.

In Section 2.0 I analyze Spotify´s operating leverage.

In Section 3.0 I analyze the evolution of the podcast and audiobook verticals.

In Section 4.0 I analyze the financials of the company 

In Section 5.0, I conclude the write up.

1.0 Thesis Recap

Spotify is not what it seems and presents one of the more asymmetric opportunities in the tech space at present.

While the market sees Spotify as a music streaming app with no competitive advantages, I see it as an audio network without any real, threatening competitors that’s in turn evolving into an audio search engine. At a P/S ratio of 2.4, the upside is vast.

The above is perhaps best evidenced by record MAU (monthly active user) growth, decreased marketing spend, and increased prices in Q3. If Spotify, as just another audio platform, is a commodity, why does it keep on growing so fast?

Q3 was our second largest third quarter ever for MAU net additions. - Daniel Ek, Spotify CEO during the Q3 2023 ER conference call.

$SPOT SG&A Expenses, €.

As you might imagine, I spend the remainder of this update proving why Spotify is not, in fact, a commodity.

The essence of our business model is to deliver unparalleled value to our user base through an ever improving consumer and creator experience.

- Daniel Ek, Spotify CEO during the Q3 2023 ER conference call.

Spotify is actually an incremental value delivery machine. Constant and rapid improvements are deeply embedded in the company´s DNA, luring customers at times subconsciously to engage at increasing rates.

Spotify´s moat is invisible to most. The market does not yet fully understand that, in the digital space, a marginally improved user experience leads to exponential adoption, both comparatively and absolutely. Spotify´s superior user experience is a result of its exclusive focus on audio, which competitors like Amazon and Apple cannot match despite far deeper pockets.

Spotify’s nascent operating leverage is the result of rapid iteration and incremental value combining with cost efficiency–the signature combination of a world-class business.

But the new part of the Spotify modus operandi is our focus on efficiencies. And we're starting to see some leverage here coming into play, but this is the state going forward.

- Daniel Ek, Spotify CEO during the Q3 2023 ER conference call.