Something very weird is happening in the stock market right now. Normally, stock market value is created by world-changing companies, but these innovative companies are collapsing. Does this mean you should sell off your stock, leave the stock market and never look back? Hardly. Near-term selloffs in gamechangers (think Amazon) are always long-term opportunities. And this is no different. Which is why I’ve grown exceptionally bullish on music streaming giant Spotify (NYSE:SPOT) stock on the recent plunge.
Spotify is taking over the music streaming world. Their platform, their technology, and their content constitute durable competitive advantages which will enable the company to emerge as a music streaming app that nearly everyone in the world will one day pay to use.
At scale, Spotify will be more ubiquitously adopted than Netflix (NASDAQ:NFLX), at a similar price point with similar profit margins. Meaning Spotify could one day be just about as big as Netflix.
Today, Netflix is a $250 billion company by market capitalization. While Spotify is worth $50 billion. Therefore, the upside potential in SPOT stock is enormous.
And the crash in SPOT stock, which has given back 20%-plus over the past month, is an opportunity for long-term investors. Nothing about the underlying fundamental growth narrative has changed here, so take advantage of this dip by buying Spotify shares on the cheap. Long-term, Spotify is a big winner!
Here’s a deeper look:
SPOT Stock Is a Huge Long-Term Winner
In the long run, SPOT stock is a huge winner thanks to two simple realities:
1) Most people will pay for music streaming one day. Everyone loves to listen to music. It has ubiquitous appeal. Yes, you can listen to music for free. But only with ads. And ads are highly interruptive to the music listening experience. Ads interrupt work flows, they can kill a workout, and they can be a real drag at parties. Ads are simply a “no-go” for music streaming.
That’s why, at scale, almost everyone who listens to music will end up paying for a music streaming platform. This includes folks in America, Europe, Asia, Oceania, South America, etc. Listening to music is a global pastime. Ads are a global pain-point. Thus, paid music streaming services will emerge as a global ubiquity.
2) Spotify will forever dominate the paid music streaming industry. That’s because Spotify, as the early leader in this space, has secured itself durable advantages over competitors. These advantages include product (Spotify has the most resources and engineers, who have created the most intuitive and appealing user interface), technology (Spotify has the most listening data in this space, and therefore, the most advanced machine learning algorithms for playlist personalization and song recommendations), and content (Spotify has signed huge exclusive contracts with major podcasters, like Joe Rogan, to build out a Netflix-like original content library — and we see how well that has worked for Netflix).
Thanks to these durable advantages, Spotify will forever remain the king of the paid music streaming industry — which will, with time, take over the entire music industry globally.
Considering these fundamental realities, it’s clear to see why SPOT stock is a huge long-term winner.
Accelerating Business Momentum
SPOT stock has come crashing down in recent weeks. If that were because of decelerating business momentum, I’d say be cautious on SPOT stock. But it’s not. If anything, Spotify business momentum will only accelerate in coming months.
Why? Because, as the world reopens, people will start listening to more music and podcasts.
Employees will commute on a semi-regular basis again, and on those hour-long commutes, listen to podcasts. Athletes will return to the gym again, and during those hour-long workouts, listen to pump-up music. Consumers will start taking Uber rides to bars again, and on those trips, listen to party music with friends.
Paid music streaming consumption will increase in 2021/22 as the world goes back to normal.
Plus, Spotify will benefit from a rebound in ad spend through its free channel.
All in all, Spotify’s growth narrative should get better — not worse — over the next few quarters. As it does, SPOT stock will correct sharply higher, not lower.
Upside for Spotify Stock
According to most folks who run the numbers on Spotify, SPOT stock is significantly undervalued today.
There are 19 analysts on Wall Street who cover SPOT stock. Their average price target? $355. That’s about 40% above the SPOT stock price today. For all of them to be that wrong all at once would be a shock.
That’s especially true since my numbers corroborate a similar “fair value.”
On the assumptions that Spotify scales to 500 million subscribers by 2030, with $35 billion in revenues and ~15% operating margins, my modeling suggests that SPOT stock is worth about $300 today.
Thus, the risk-reward on SPOT stock looks compelling.
Bottom Line on SPOT Stock
The tech sector meltdown has created multiple golden buying opportunities. And Spotify is one such opportunity that ranks among my top “Digitainment” stocks to buy, but it’s far from my only pick.
The world’s entertainment services are being digitized at a pace that’s accelerating, as globalization and technological convenience converge to create a more tech-centric society.
My top hypergrowth stocks in this megatrend include companies from social media, advertising, streaming TV and iGaming.
Get my complete list of stocks to buy in Digitainment by subscribing to Innovation Investor today.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
By uncovering early investments in hypergrowth industries, Luke Lango puts you on the ground-floor of world-changing megatrends. It’s how his Daily 10X Report has averaged up to a ridiculous 100% return across all recommendations since launching last May. Click here to see how he does it.
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