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Should You Buy Spotify (SPOT) Stock Based On Its Broader Media Ambitions?

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Shares of Spotify (SPOT - Free Report) have climbed roughly 16% since the streaming music powerhouse went public in early April. But the industry Spotify helped popularize is more crowded these days. So let’s evaluate Spotify as it tries to push further into video after it announced a splashy new hire on Tuesday.

Video

Spotify just appointed Dawn Ostroff as its new Chief Content Officer. She will lead “all aspects of Spotify’s content partnerships across music, audio, and video. Ostroff is set to join the company in August after she officially leaves her role as President of Entertainment at Condé Nast. Before heading up the entertainment division of the parent company of Vogue, Vanity Fair, GQ, and The New Yorker, she worked as a top executive at the CW and UPN networks, where she developed popular TV series, including Gossip Girl and The Vampire Diaries.

Ostroff is set to take over a role left vacant since January when Stefan Blom left the company after three years. The new hire’s background far outside of the music world helps demonstrate Spotify’s willingness to explore a wide range of new video content.

The news came roughly three years after Spotify promised a significant move into video. At one point, Spotify launched short-form video content from ESPN (DIS - Free Report) , Comedy Central and MTV (VIAB - Free Report) , and more. Today, Spotify’s video offerings mostly revolve around music-based content, which includes music videos, as well short behind-the scenes-type shows.

Fundamentals

Spotify’s video push also comes as it tries to find new revenue streams, beyond its main, low-margin streaming music business because, for all of the talk that Spotify is the next Netflix (NFLX - Free Report) , the company eventually has to sidestep the major record label gatekeepers that it pays extremely high royalty fees.

The company has tried to work directly with up-and-coming artists, in a more record label capacity, which has drawn backlash from the likes of Universal, Sony, and Warner. But unlike Netflix and Amazon (AMZN - Free Report) , which were able to become their own TV and movie studios, after they anticipated the likes of Disney (DIS - Free Report) and others starting their own streaming services, Spotify might never be able to break into the music business and own the rights even though it has helped revitalize the music business when it looked like the illegal download market might become the new norm.

Still, Spotify is the most dominant player in the music industry, currently boasting 170 million monthly active users. Spotify claimed 99 million ad-supported users along with 75 million paid customers, with premium customers making up over 90% of its $1.37 billion Q1 revenues. Furthermore, the company’s premium users climbed 45% from the year-ago period, outpacing the free version’s growth of 21%—Spotify premium costs $9.99 a month. 

Industry Overview

One might think its user base would give Spotify outsized influence to negotiate better deals with record labels, which it has to some degree, but it is hard to imagine a scenario where the people who own the rights to the music don’t always hold the upper hand. This dilemma looks even worse when investors consider that Spotify currently faces competition not just from Pandora (P - Free Report) and its 5.63 million premium subscribers, but from three of the biggest tech companies in the world.

The much newer Apple (AAPL - Free Report) Music reportedly has 38 million subscribers—though CEO Tim Cook recently noted the service has 50 million users including people on a free trial. Apple Music’s premium services are offered at nearly the exact same price point as Spotify, but Apple just has more money to spend, considering it pulled in quarterly revenues of $61.1 billion.

Meanwhile, Amazon’s premium streaming service, called Music Unlimited, which is currently separate from Amazon’s widely popular Prime service, costs $7.99 a month for Prime members and $9.99 for non-prime members. Amazon last noted the service had “tens of millions" of paid customers. And not to be outdone, Google (GOOGL - Free Report) is the latest tech giant to enter the premium streaming industry, with its new YouTube Music.

Bottom Line

Spotify is a Zacks Rank #3 (Hold) that sports an “A” grade for Growth in our Style Scores system. Meanwhile, the company is projected to see its full-year revenues reach $6.17 billion based on our current Zacks Consensus Estimates, which would mark a roughly 33% surge. However, like many other young tech companies, Spotify is projected to remain unprofitable over the next few years.

Therefore, it seems like Spotify stock might be worth keeping an eye on in order to evaluate how its video push pans out and see if its tech giant competitors steal some of its market share. And don’t forget to pay particularly close attention to Spotify’s margins going forward. 

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