- Spotify (SPOT) stock is resembling Netflix, and in 2022 that’s not good.
- In a world filled with podcasts, the company’s flywheel growth strategy is not a sure thing.
- Keep SPOT stock on your watchlist for now.
It’s lonely at the top. That’s how I look at the state of Spotify (NYSE:SPOT) stock. The leader in streaming audio is going through a selloff that is indicative of another streaming giant. And of course, I am referring to Netflix (NASDAQ:NFLX).
Both Netflix and Spotify were considered “essential services” in 2020. But both stocks have been caught up in the tech selloff, and are unlikely to reclaim their 52-week highs anytime soon.
However, there is good news: In the most recent fiscal year, Spotify managed to grow revenue on a year-over-year (YOY) basis. The company posted more than $10 billion in revenue, a 28% increase on the top line. And although it’s not yet profitable, the streaming giant saw a 67% improvement on the bottom line. And some of the higher estimates suggest the company may be profitable sometime in 2022.
One thing that is helping the company is an increase in the number of paid subscribers to Spotify Premium. This allows listeners to have an ad-free experience. However, this will only get the company so far.
To their credit, they realize this. The company is clear on where it expects its future growth to come from. However, it’s anyone’s guess as to whether they can achieve that growth. And that’s what I’m taking a closer look at.
Do We Have Too Many Podcasts?
So, do we have too many podcasts? That’s blasphemy to true believers. But this is a conversation that’s been happening for the last few years. And if the answer is yes, it could have a profound impact on Spotify’s “flywheel” growth ambition.
As the company outlined on its last earnings call, the company is looking at advertising comprising at least 20% and perhaps up to 40% of their revenue at some point in the future.
Currently, advertisers are pleased with the variety of content available on Spotify. However, to achieve the ad growth the company needs it will need more inventory.
In the flywheel scenario, they outline the following: More content will lead to more advertising demand, which will lead to even more content. And round and round we go.
That said, the problem was described as far back as 2019. In a world that now has millions of podcast episodes, how does one get discoverability? Basically, it means that there are many podcasts that have low listenership and even lower marketing budgets. This leaves them with very little chance for success.
Put another way, there’s only one Joe Rogan. And that’s why Spotify was willing to take a black eye from progressives to keep his podcast on its platform.
Moreover, to say it in another way, there are a lot of hobbies that are masquerading as podcasts. In fairness, Spotify is attempting to create tools that will help content creators go directly to their audience. But this seems like a tall order.
My point is that if I’m highlighting this, it won’t be lost on advertisers. And that means the ceiling for revenue may be lower than Spotify thinks.
Keep SPOT Stock on Your Watchlist
I want to like SPOT stock, and I’ll concede it might make for a profitable trade. But as an investment, I’m inclined to stay away. The company is not yet profitable and the company is refraining from issuing full-year guidance at this time.
For that reason, I see Spotify as one to keep on your watchlist. But until there’s more indication that the company is making progress with their flywheel model, I’d advise staying on the sidelines.
On the date of publication, Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for InvestorPlace since 2019.