And you won’t believe how much this investment bank thinks Spotify will be worth in the long run.
Four months ago, private trading in Spotify shares pushed the company’s valuation to $13 billion. Then, late last month, the company was valued at $16 billion.
The popular music platform has a promising future on Wall Street. Yet, one key fact has investors worried: in nine years, the company has yet to post a profit.
That hasn’t stopped investment banks from rallying behind Spotify, however.
According to GP Bullhound, once Spotify goes public, it will have a $20 billion valuation. By 2020, the platform will be worth $55 billion.
Earlier this morning, the investment bank presented their thesis on Spotify’s shares on Wall Street. GP Bullhound explained why the platform will eventually reach $100 billion.
Surging subscriber numbers in emerging markets.
Last July, Spotify announced that it had reached 60 million paying subscribers. The company also announced that it had surpassed 140 million monthly active users.
GP Bullhound explained that the Swedish music platform has grown faster than expected thanks to growth in emerging markets. Mid-2018, the investment bank expects Spotify to reach 100 million subscribers.
By the end of 2020, the platform’s user base could reach 500 million, with around 200 million paying for a monthly subscription.
The report reads,
“Spotify have introduced family plans and student discounts and if we factor in that emerging markets have a much lower average revenue per premium subscriber we believe that Spotify will see a steady decline in revenue per premium subscriber moving towards 2020 compared to today’s value.”
The investment bank also explained why the platform will see a decline in revenue per paying user.
“This is the reason why we have decreased our estimated average revenue per premium subscriber to $80 — compared to $88 in 2015 and $89 in 2016.”
GP Bullhound added that advertising “could lead to a higher revenue per non-premium subscriber than previously anticipated.”
Expect even more losses on the road to profitability
Spotify may have reached 60 million subscribers. Yet, the investment bank warned that investors should expect growing operating losses. These losses will likely “distract… from the true value that is being created.”
Despite increasing losses, however, GP Bullhound remains optimistic about the platform’s revenue gains. Currently, for every $1 Spotify invests in paying subscribers, it gets $3 back. As revenue per user stabilizes, the platform will get $5 back in 2020.
$100 billion and counting
According to GP Bullhound, its $20 billion Spotify valuation is based on the service having 70 million paying users and 100 million on its ad-supported service once the IPO launches.
In the long-run, the investment bank posits that the platform will reach $100 billion.
“Given that Spotify’s growth continues and that emerging market growth keeps average revenue per premium subscriber relatively in shape we envision that Spotify has a long-term potential of being valued at $100 billion.”
But, what about the company’s competitors?
In two years, Apple Music has reached 30 million premium subscribers. It took the Swedish company nine years to reach 60 million users. It’s important to note that Apple doesn’t offer a free, ad-supported tier.
Yet, the bank believes that Apple won’t beat Spotify “anytime soon.” In fact, as opposed to competitors, GP Bullhound noted that the Swedish music platform offers a “simpler user interface.”
In the report’s conclusion, GP Bullhound wrote that Spotify shouldn’t underestimate the competition. Apple recently introduced its HomePod speakers, which could become a “threat” to the Swedish music platform.
To avoid falling behind, the investment bank suggested that Spotify could partner with smart speaker hardware makers. Yet, deals could become expensive.
“Both points mentioned above could, in turn, require significant investment in both capital and time.”
Image by Tracy O (CC by 2.0)