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Analyst Speculates Spotify Could Be Worth $70 Billion In 3 Years

Analyst Speculates Spotify Could Be Worth $70 Billion In 3 Years
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Streaming music provider Spotify was reportedly worth more than $19 billion at the end of 2017 and could be worth as much as $70 billion in just three years, according to MKM Partners.

The Analyst

MKM Partners analyst Rob Sanderson commented on Spotify's upcoming initial public offering. MKM did not initiate coverage of Spotify and is not participating in the company's listing. 

MKM: Profit Is Possible

One of the biggest misconceptions among investors is that digital music services like Spotify can't make money and the platform is at the mercy of music labels and music publishers, Sanderson said in a research report.

"We think the growing friction within the industry is between artists and labels," the analyst said. "Labels continue to take the large majority of economics while their value-add is diminishing in a streaming world." 

Spotify was estimated to have paid 17 percent of the music industry's total revenue in 2016, according to MKM Partners. An estimated $826-million year-over-year increase in payments to rights holders accounted for more than 90 percent of the year-over-year increase in total industry revenue. In 2017, the estimated $3.2 billion in royalties paid by Spotify represented nearly 20 percent of total industry revenue, the analyst said. 

Related Link: Apple Music: How Does It Compare To Spotify?

The Path To $70 Billion

MKM estimates Spotify's net profit in 2022 at $2.7 billion. Spotify's stock should be able to carry a 25x forward P/E multiple, if not higher, as the earnings growth story carries momentum, Sanderson said. Applying the 25x multiple would yield a $70-billion market cap for Spotify around 2021. 

Spotify will continue to take advantage of the fact that digital music subscription market remains "relatively small," at around $9 billion in 2017, the analyst said. The total addressable market for Spotify in the years ahead is in the billions, he said — a reasonable assumption given Facebook's 2-billion user base, YouTube's 1.5-billion user base and Instagram's 800-million user base.

In the more than 60 countries where Spotify operates, there are 1.3 billion payment-enabled smartphone users and this figure could grow to 1.6 billion by 2021, Sanderson said. Countries where Spotify has yet to operate represent another 1.4 billion potential clients with payment-enabled smartphones by 2021. 

Spotify's business could benefit from adjacent opportunities over time, including ticketing and artist promotions, according to MKM. The company is "well-positioned" to disrupt these and other new business ventures over time, which would also serve as a "powerful differentiator" for Spotify's Premium subscription members, Sanderson said. 

Related Link:

Spotify Could Be A $100 Billion Company

Latest Ratings for SPOT

Jul 2018B. Riley FBRMaintainsNeutralNeutral
Jul 2018Morgan StanleyMaintainsOverweightOverweight
Jul 2018Stifel NicolausMaintainsBuyBuy

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