Short fundamental analysis of Spotify - SPOT

Spotify is a well-known company providing audio streaming services worldwide. Today I take a quick look at the company as it’s a well-known growth stock which many people seem to misunderstand.

Business model

“Our mission is to unlock the potential of human creativity by giving a million creative artists the opportunity to live off their art and billions of fans the opportunity to enjoy and be inspired by these creators” Spotify 2020 Annual report

Spotify is a founder-led company and currently makes money from advertising and subscriptions. Spotify has a free tier on which advertisements are shown and premium which comes at different prices depending on the package.

Aside from songs Spotify is aggressively expanding into podcasts on their platform trying to become a service for all audio streaming. Spotify does pay significant royalties towards label companies to be able to list songs on the platform as can be shown by Gross profit being significantly lower than Cost of Revenue (in 2020 Cost of revenue was 74.4% of Revenue)


With rights for lots of songs acquired and generally low other operating costs Spotify could fall into the category of medium quality tech stocks with great scaling potential. At a larger scale G&A costs would be a smaller % of Gross profit as they do not seem to grow at the same rate as Gross profits. Cost of revenue also does not seem to scale together with revenue which is splendid.

FY 2020

Q3 2021

This is also indicated by the growth in MAU which is the base for future growth. Looking at the graph we can see that 2020 saw a bit higher than expected growth while 2021 was a bit less exciting. Overall it does not seem to be deviating from the trend too much although competition from Youtube Music for example which is included with Youtube premium has put more pressure on Spotify.

Source: Statista

Spotify also is finally generating positive operating income in the last couple quarters although it projects operating Profit to be negative again in Q4 2021. Spotify is focussing more in acquiring users through podcasts which seems to be very effective in Latin America and India as those are less saturated markets.

Total MAU per region, from Q3 2021 report

Spotify has a chronic problem with monetising the non-premium users as they can’t fill the advertisements with paying advertisers (thus the explaining Spotify premium adds to fill the void). As a significant amount of users switches to premium this also prevents new advertisers from going into business with Spotify in regard to the free tier. This is a vicious circle that Spotify seems to not really have a solution for currently.


Spotify provided the following Guidance:

  • Total MAUs: 400-407 million
  • Total Premium Subscribers: 177-181 million
  • Total Revenue: €2.54-€2.68 billion
    • Assumes approximately 250 bps tailwind to growth Y/Y due to movements in foreign exchange rates
  • Gross Margin: 25.1-26.1%
  • Operating Profit/Loss: €(152)-€(72) million

This outlook indicates a pickup of the growth rate in MAU while Gross margins remain lower (relative to Q2 2021). The main opportunity with Spotify is an above-expected growth rate in MAU and better margins in the medium term and increased negation power regarding the label companies as Spotify becomes big enough to be able to negotiate better contracts. This could become a positive feedback cycle with higher overall margins.
2020 Annual report:
Q3 2021:


Thanks for the DD.

Love the company - it’s already on my (extremely) shortlist for potential investment when the tax year rolls over.


That’s a great rundown, thank you, I opened a position during the recent market rout.

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As always, really great work!

Spotify is down 22% since Nov. 1st so perhaps an interesting opportunity as one of the few well-known growth stocks that has stayed flat since its covid jump. One of the main concerns with recent numbers still remains though as MAU growth slowed down this year, perhaps justified by a higher growth rate last year, but will it pick back up is the uncertainty here.

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