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When evaluating potential investment opportunities, understanding the growth trajectory of the underlying industry can offer valuable insights into a company’s prospects. Let’s explore how Spotify, a global leader in music streaming, could deliver an estimated compound annual growth rate (CAGR) of 25.5% over the next three years—provided no significant global market corrections occur during this period of time.
Industry Growth as a Foundation
The music streaming industry is projected to grow at a CAGR of 4.9% from now until 2027 (source).
As of today, Spotify holds an estimated 55% share of this market. If Spotify can increase its market share to 60% within the next three years, this growth, coupled with Spotify’s strategic advantages, could set the stage for substantial revenue expansion.
Revenue Growth Projections
Spotify’s revenue is forecasted to grow at an average rate of 12% per year through 2027. While this may appear conservative compared to their six-year median revenue growth of 16% (source) and the analyst consensus of at least 14% annual growth for the next two years (source), it reflects a cautious outlook. Furthermore, Spotify’s guidance for 2024 predicts 17% growth, indicating potential for upward surprises.
Why Spotify Could Capture More Market Share
Several factors support the assumption that Spotify’s market share could climb to 60%:
High Barriers to Entry:
Securing content licensing agreements with music labels is costly and complex. Spotify’s established relationships provide a competitive edge.
TikTok’s decision to shut down its music streaming business (source) highlights the challenges of entering this market.
Antitrust Pressure on Competitors:
Major rivals like Amazon Music, YouTube Music, and Apple Music face antitrust scrutiny, which could limit their ability to expand aggressively (source).
Furthermore, the global music streaming market is valued at $35 billion (source). For competitors with an already substantial revenue base—Amazon ($620 billion), Apple ($391 billion), and Alphabet ($339 billion)—further expanding their market share in the music streaming industry may have limited impact on their overall top-line growth. Consequently, these companies might prioritize channeling their resources into other growth opportunities, leaving Spotify better positioned to increase its share in the market.
Superior User Satisfaction and Innovation:
Spotify’s app consistently receives excellent ratings on Android and iOS platforms (Google Play, App Store).
Innovations like AI-driven podcast and playlist recommendations demonstrate Spotify’s focus on enhancing user experience (examples).
Catalysts for Valuation Upside
Spotify’s Price-to-Sales (PS) ratio currently stands at 5.8x. Several developments could drive its valuation higher:
Reaching 1 Billion Users:
Spotify’s Monthly Active Users (MAU) have grown at a 27% CAGR since 2015 (source), currently standing at 640 million.
At this rate, crossing the 1 billion user mark is achievable and would cement Spotify as one of the world’s largest platforms.
Sustained Profitability:
Spotify recently reported USD 729 million in income.
Its historical track record of exceeding EBIT guidance (outperforming 19 out of 23 times since Q1 2019) is a positive indicator for sustainable growth (source).
(note): pending 2024 Q4 EBIT figures to be for the complete 2024 EBIT figures.
Crossing the USD 1 Billion Income Threshold:
Achieving this milestone would elevate Spotify’s profile among investors and attract additional capital.
By 2027, assuming a PE ratio of 70x (a more conservative compared to analyst estimates that Forward PE will be <40x by end of 2026 - source),
Spotify would need to generate USD 3 billion in income with a 14% profit margin. This target seems attainable given Spotify’s
operational improvements and
increased likelihood bargaining power with record labels, especially with a 60% market share.
Spotify's market share increase in the music streaming can increase their supplier power and improve their negotiating odds to get a more favourable royalty rates with the record label companies.
Based on these catalysts, a reasonable PS ratio by 2027 could range from 6.7x to 9.5x, depending on market sentiment and profitability improvements.
Risks and Caveats
While these projections are compelling, they are not without risks:
Macroeconomic Factors: Global stock market corrections or unfavorable macroeconomic conditions could impact Spotify’s growth regardless of its financial performance.
Long-Term Forecasting: Industry growth rates and company projections beyond 3–5 years are subject to significant variability, influenced by changing market dynamics and external pressures.
Conclusion
By leveraging industry growth rates as a starting point and considering company-specific factors such as market share expansion, profitability, and innovation, investors can better estimate Spotify’s growth potential. If Spotify’s trajectory aligns with these assumptions, it could deliver a 25.5% CAGR through 2027. However, investors should remain vigilant, regularly revisiting assumptions as new data emerges.
Additional sources for reference:
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