Both Netflix (NASDAQ: NFLX) and Spotify (NYSE: SPOT) had great starts to 2025, but investors soured on the streaming giants in the back half of the year. Shares of both have fallen between 25% and 30% since midyear as poor earnings results have weighed on the stocks.

But with the drop in price for each stock, investors may have an opportunity to scoop up shares of a great company at the forefront of a long-term growth trend in streaming media. One of the streaming companies stands out as a great opportunity heading into 2026. 

What's weighing on each stock?

Shares of Spotify began to fall after the company released its second-quarter earnings results, which showed a worsening operating margin and negative earnings per share. It course corrected somewhat in the third quarter, but CEO Daniel Ek announced he was stepping down and the company provided weak fourth-quarter guidance, sending the stock lower.

Netflix stock also sold off after its second-quarter earnings due to management's disclosure that its strong financial results and outlook were driven by improvements in foreign-exchange rates rather than increased engagement or willingness to pay from consumers. The sell-off accelerated after a one-time Brazilian tax weighed on third-quarter results. More recently, Netflix's proposed acquisition of Warner Bros. Discovery has pushed shares lower, as investors see regulatory and operational challenges for the merger.

To be sure, neither company is showing significant weaknesses. However, with both stocks priced for strong and continuous growth, any minor hiccup can lead to investors losing confidence in the company's value and selling their shares. A company with a strong competitive advantage is better equipped to weather setbacks and overcome financial challenges, as its operating results ultimately prevail in the long run. I believe one of these companies has a greater competitive advantage that should enable it to produce strong long-term results and could allow the stock to bounce back quickly in 2026.

Which company has a wider moat?

One of the biggest indicators that Spotify and Netflix have competitive advantages in the market is that they've both been able to increase prices. Spotify made two pricing changes in the United States in 2023 and 2024, and another price increase could be on the way next year. Netflix, meanwhile, has consistently raised prices since 2014.

Spotify currently charges a premium relative to competitors, but it also includes additional content with the price. Specifically, premium subscribers can listen to 20 hours of audiobooks each month. Differentiated content is key for the streaming service to stand out from the pack.

But acquiring differentiated content in music streaming is practically impossible. Every service has access to the same 100 million songs, and they all pay the record labels relatively standard royalties for access to their libraries. That means that Spotify doesn't have a clear advantage in content, and it doesn't have a lot of leverage on its content costs. That will limit its margin expansion over time.

By comparison, Netflix has built a differentiated library of unique content on its platform through a combination of original productions and exclusive licensing agreements. As the largest video streaming service, it can afford to spend more money on productions and licensing agreements for key content, as it amortizes those costs over a larger number of subscribers. It doesn't pay a fee every time someone streams a show like Spotify. As a result, it's able to produce meaningful margin expansion over time.

Netflix historically sets a target operating margin at the start of the year. With its highly predictable subscription revenue, it's able to manage its content spending to come very close to its target in normal circumstances. Despite the Brazilian tax it paid last quarter, management's full-year outlook still calls for its operating margin to expand 1.6 percentage points for the year. Spotify has less room to control costs and expand its margins.

A better value

The market prices Netflix stock at a much more attractive valuation than Spotify, with shares trading hands at less than 30 times analysts' consensus estimate for 2026 earnings. Spotify shares, by comparison, will cost closer to 50 times 2026 estimates.

That said, analysts expect Spotify to deliver strong earnings growth over the next few years. But with its high valuation, any revision in those estimates lower could cause the stock to pull back further. Netflix might not have the same expected earnings per share growth, but investors can have more confidence in the company hitting those targets. Strong execution in 2026 should push the stock price back toward its all-time high and beyond.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Netflix vs. Spotify: Which streaming giant is poised for a comeback in 2026? appeared first on The Motley Fool Australia.

Some invest in safe-haven stocks and assets, while others are willing to take on more risk in the hope of hitting the jackpot.

The Australian recently compiled a list of 10 Australian billionaires, and the stocks they like to invest their money into.

Gina Rinehart

The Australian heiress, billionaire mining magnate, and businesswoman has built a $2 billion stock portfolio through Hancock Prospecting. It consists mainly of mining stocks and exchange-traded funds. The company owns shares in US-listed stocks such as Tesla Inc (NASDAQ: TSLA), Fox Corp (NASDAQ: FOX), and Trump Media & Technology Group Corp (NASDAQ: DJT).

Hancock Prospecting also has exposure in Australian markets. Hancock is a major shareholder in gold producer Ballard Mining Ltd (ASX: BM1), which floated on the ASX on July 14, 2025. 

Gerry Harvey

Australian entrepreneur and executive chairman of Harvey Norman Holdings Ltd (ASX: HVN), Gerry Harvey, backs New-Zealand based Briscoe Group Ltd (ASX: BGP). Briscoe comprises homewares stores and now Rebel Sports outlets. 

Bruce Mathieson

Bruce Mathieson is known for his influence in the Australian pub, hotel, and gambling sectors. 

According to The Australian, Mathieson has some of his fortune locked up in Endeavour Group Ltd (ASX: EDV) shares, shares in Star Entertainment Group Ltd (ASX: SGR), and shares in Mayne Pharma Group Ltd (ASX: MYX). He also has shares in RAS Technology Holdings Ltd (ASX: RHL).

Chris Morris

Chris Morris built share registry services firm Computershare Ltd (ASX: CPU) and maintains a large holding in the business. He also has shares in US data storage company Seagate Technology Holdings PLC (NASDAQ: STX).

James Packer

The Crown Resorts Ltd (ASX: CWN) king sold out of the business in 2022 and has since invested money into US technology stocks. His biggest holdings are in Nvidia Corp (NASDAQ: NVDA), Taiwan Semiconductor Manufacturing Co Ltd (TPE: 2330), Shopify Inc (NASDAQ: SHOP), Spotify Technology SA (NYSE: SPOT), and Monday.Com Ltd (NASDAQ: MNDY).

Alan Rydge

Alan Rudge's wealth is mostly in two ASX-listed companies, which he has led for 45 years – Carlton Investments (ASX: CIN) and EVT Ltd (ASX: EVT). He is also a long-time stockholder of Harvey Norman shares.

Ed Craven

Ed Craven is Australia's youngest billionaire. He is well known for his cryptocurrency gambling empire Stake.com, and Kick streaming. He and his business partner Bijan Tehrani also have a 5% shareholding in Australian bookmaker Pointsbet Holdings Ltd (ASX: PBH).

Bruce Gordon

Bruce Gordon owns the Australian television network WIN Television through his ownership of WIN Corporation, the largest shareholder of Nine Entertainment Co Holdings Ltd (ASX: NEC). He also has shares in Singapore's mobile and telecommunication network Tuas Ltd (ASX: TUA).

Kerry Harmanis

Kerry Harmanis was the founder and executive chairman of Jubilee Mines NL, a highly successful Western Australian nickel miner which he established in 1987. Today, he still dabbles in mining shares, including Talisman Mining Ltd (ASX: TLM) and Centauras Metals Ltd (ASX: CTM).

Mark Creasy

Mark Creasy is one of Australia's most successful prospectors. He has a minority stake in nickel and lithium miner IGO Ltd (ASX: IGO), as well as a handful of other mining stocks. He recently invested into exploration company Lexington Gold Ltd (LON: LEX).

The post Australian billionaires: Which stocks do they own? appeared first on The Motley Fool Australia.

By now, my hunch is that you've caught on to some of the major things influencing the stock market this year. As a refresher, mixed economic data, uncertainty surrounding policies from the Federal Reserve, and of course President Donald Trump's tariff agenda have combined to make a series of clouds shading what direction the markets might move next.

But even amid all of this uncertainty, some industries have proven resilient throughout the year. Within the broader technology sector -- which itself has had a tough year so far -- the communication services industry has held up relatively well. If you're unfamiliar with communication services, these are businesses that touch areas such as advertising, entertainment, and internet content consumption.

When you think about these categories, my guess is your mind rushes straight to Netflix -- and for good reason. As of the closing bell on June 5, shares of Netflix have gained 40% so far this year. That absolutely crushes the breakeven returns of the S&P 500 and Nasdaq Composite.

While Netflix remains a quality business, there is another streaming stock that has been quietly outperforming the competition. With shares up nearly 60% year to date, Spotify Technology (NYSE: SPOT) might be a company to put on your radar.

Below, I'll detail why streaming stocks have outperformed the broader market this year. From there, I'll cover why I think Spotify could be Wall Street's next big stock-split stock and explain how this process works for investors.

Why are streaming stocks crushing the market in 2025?

Perhaps the biggest factor weighing on growth stocks at the moment is how President Trump's tariff policies will shake out. Tariffs are taxes that are placed on goods imported or exported from the country. Usually, tariffs are used as a negotiation tactic in order to change policies with trade partners. While there can be strategic value to implementing tariffs, they can also lead to periods of higher costs (inflation) for businesses.

Unlike many companies in the technology landscape, streaming businesses don't have much to worry about when it comes to tariffs. For the most part, streamers rely on the consumption of digital content such as movies, television, music, or audiobooks. Given these companies don't have much in the way of physical manufacturing or rely on imported or exported goods, streaming is a relatively tariff-resistant business -- making them particularly attractive investments right now.

Why I see Spotify as a prime stock-split candidate

The chart below illustrates Spotify's stock price since its initial public offering (IPO). As investors can see, shares of the streaming giant are hovering near all-time highs.

SPOT data by YCharts

Sometimes when a stock price starts to rise in an exponential fashion, investors will shy away from buying. Said another way, a high share price can be perceived as an expensive stock and investors will begin looking for alternatives.

Considering that Spotify has never split its stock, combined with its climbing share price, I see the company as an interesting stock-split candidate.

How do stock splits work?

Stock splits are a simple form of financial engineering. For argument's sake, let's say Spotify announced a 10-for-1 stock-split. How would this work? Essentially, Spotify's share price of $710 would be split tenfold. In other words, Spotify's split-adjusted stock price would be about $71. At the same time, however, the company's outstanding shares would rise by tenfold.

Given the stock price and the outstanding shares change by the same multiple, the market capitalization of Spotify would remain unchanged.

Should you buy Spotify stock right now?

If the valuation of the company doesn't change, what is the point of a stock split? As I alluded to above, when share prices go higher investors often perceive the stock as expensive -- regardless of what valuation multiples might suggest.

Given a stock split results in a seemingly lower (or less expensive) share price, they often result in a new cohort of investors pouring in and buying the stock. Ironically, this activity can actually fuel the market cap of the company higher on a post-split basis. This means that even if you own more shares at what appears to be a lower share price following a split, you might actually be investing in the company at a higher valuation.

With that in mind, let's explore whether Spotify is a good stock to buy right now -- regardless of whether or not the company chooses to split its stock.

SPOT PE Ratio (Forward) data by YCharts

Per the comparable company analysis pictured above, Spotify trades at a notable premium compared to other streaming and entertainment companies on a forward earnings basis.

In my view, Spotify is a pricey stock right now and the current momentum in share price has led to some notable valuation expansion. Normally, I would not chase at these levels -- as I'd view the stock as overvalued. However, given how sensitive the capital markets are right now on the tariff rhetoric and Spotify's proven resiliency in this environment, I'd consider scooping up shares on any dips that might occur.

In the long run, I see Spotify as a best-in-class opportunity in the streaming landscape and a stock deserving of a premium.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post This monster streaming stock has quietly crushed Netflix in 2025. Could a stock split be on the horizon? appeared first on The Motley Fool Australia.

Demasi notes the Montaka portfolio is invested in 'compounders' like Amazon and Microsoft. These businesses are an important part of the portfolio and can deliver outperformance over the long term. This is because of their "strong positions in attractive markets that allow them to sustainably grow their earnings power long into the future", Demasi says.

But he says there is another type of stock worth looking at – "outliers" — which can become the long-term winners or compounders of tomorrow.

What's an outlier?

The fund manager would describe a stock as an outlier if it has "exceptionally high return potential". That's typically because it's much earlier in its growth journey. According to Demasi, they're "on their way to taking off, and that usually means they've got a lot of promising growth and value creation ahead of them".

Certainly, smaller businesses are not guaranteed to go on to great things. Demasi warned that there's "a risk it may not happen". But if a business does get there, the rewards can be "amazing".

Why should investors want to invest in outlier stocks?

Demasi thinks outlier stocks can make big returns for investors:

Successful outliers can add significantly to the return potential of the portfolio.

Outliers combine the large payoffs from early-stage success with the power of rapid growth as they go on to become compounders.

So, we think outliers represent an opportunity to really add meaningfully to the power of the portfolio's returns by complementing the compounders.

What are the risks?

Of course, the main risk is that the investment doesn't go well. The fund manager said that growth is a lot less certain for outliers than compounders. That's why Montaka allocates a "much smaller" weighting to outliers.

Montaka only invests a maximum of 20% of its portfolio in outliers. This is then spread across several names. Demasi explained how his team tries to limit the risk of such outliers:

No one position is going to be overly large, especially compared to what we do in the compounders.

And what we try to do is look for companies in that set of outliers that have different value drivers and risk factors as well, so that they're mostly unrelated and uncorrelated to each other.

Montaka also typically doesn't invest more in outliers if they've declined. This is a different approach to what happens with the portfolio's compounders. According to Demasi, when outliers drop in value, there "isn't that same level of certainty looking out into the future as you find with compounders".

What are some outliers?

For the Montaka portfolio, which is globally-focused, he referenced Spotify as the largest outlier position in the portfolio. Even though it already has half a billion users, it's "still establishing itself" and Montaka believes it's quite early on in its business lifecycle.

If Spotify can remain the number one player, build out its capabilities, and compete "furiously" against others like Apple and Alphabet's YouTube, it could be a "10-bagger" over the rest of the decade, according to Demasi.

The fund manager didn't name any ASX stock examples, so I'll point to a couple of articles I've recently written, like this one and this one, where I cover some smaller opportunities that I believe could grow significantly.

The post The power (and risks) of buying 'outlier' stocks for your portfolio appeared first on The Motley Fool Australia.

There are a couple of reasons for this, which we will discuss below.

Reason 1: Market timing is impossible

As we have seen a lot in recent years, the share market is incredibly unpredictable. This means that short-term investors are particularly susceptible to market fluctuations, which can lead to significant losses if the timing is not optimal.

A good example is the chaos that ensued during the height of COVID-19. If you bought in around that time and saw your short-term investments lose 20% to 30% of their value, you may have had to lock in those losses.

However, investors that were able to hold on for the long-term are likely to have not only recouped their losses, but seen their shares now roar higher. They may also have received a few nice dividend payments during this time.

In respect to this, a recent note from Montake Global Investments highlights the following:

The share price of Foot Locker, an athletic apparel company in the US, halved during the COVID pandemic as reported profits fell by more than half in 2020. Then in the following year profits almost tripled and the stock price rose more than three-fold from trough to peak when the economy rebounded.

Reason 2: Potential for outsized returns

Another reason that short-term investing might not be the best way forward is the difference between potential returns thanks to compounding.

And this isn't if you can only identify small companies on the rise. Montake Global Investments points out that even holding onto shares in a company the size of Microsoft Corp (NASDAQ: MSFT) could be very rewarding over the coming years. It explains:

If Microsoft's trading multiple held its ground, earnings grew in line with our projections, and excess cash flows were paid out to shareholders in dividends, then Microsoft stock could be a 'four-bagger' over the 7-year horizon.

A less mature company, such as Spotify Technology (NYSE: SPOT), could generate even greater returns. The investment company points out:

In fact, the potential for upside can be even greater when burgeoning companies go on to achieve 'outlier' levels of success over extended periods. Spotify, the world's most popular streaming service, could end up being a 'ten-bagger' over the next decade as its base expands past one billion listeners worldwide, more services are offered, advertising takes off, and profitability inflects from break-even today.

Unless you're exceptionally lucky, this is unlikely to be able to be replicated from short-term investing according to Montake. It adds:

Unfortunately, the possibility of making multi-bagger gains is considerably diminished by investing over much shorter horizons, because earnings growth does not have time to change exponentially and changes in valuation multiples do not usually expand so quickly, if at all.

The post 2 drawbacks of short-term investing appeared first on The Motley Fool Australia.

The Motley Fool chats with the best in the industry so that you can get an insight into how the professionals think. In this edition, Schroders portfolio manager Ray David picks the two ASX shares he would buy right now, although he actually mentions three.

Hottest ASX shares

The Motley Fool: What are the two best stock buys right now?

Ray David: Two favourites, and these make up two big positions of the fund. 

The first one is Ramsay Health Care Ltd (ASX: RHC). Ramsay is the largest provider of private hospital services in Australia and France, and also third largest player in the UK. 

During COVID, private hospitals were hit hard by elective surgery cancellations and also had cost blowouts because of nurses having to isolate. And then Ramsay having to effectively backfill those nurses with high-cost agency staff. So you had revenue declining and costs going up and profitability really took a hit. 

But that's all behind us now. We think the outlook for elective surgery volumes looks really strong because there's quite a big backlog. And those cost headwinds associated with COVID are really abating. So we expect Ramsay to deliver pretty strong earnings growth in '23 and '24 that's well above market growth.

In addition to that, during the pandemic, Ramsay invested over $2.7 billion to upgrade its facilities and expand its facilities, which it really hasn't had any benefit from. So it's positioned quite well to come out of this COVID period with extra capacity to cater for the backlog. 

In the longer run, they've got positive demographic trends. So they've got increasing healthcare utilisation, [an] ageing population, and pretty strong support [from] the government for a private healthcare system. 

Outlook looks really strong and the valuation looks incredibly cheap. 

What really highlighted how cheap the stock was, [private equity firm] KKR came in and bid for the stock around $88 per share and it really shone a light on Ramsay Health Care's freehold property.

[Ramsay] basically owns a significant or most of all their Australian properties — hospital sites. Based on our analysis, we think if you were to spin off the property, that accounts for about $30 a share compared to the stock where it's trading in the mid-$60s. 

So it's a company that's got strong tailwinds and a good earnings outlook and there's a big property freehold there that's supportive of the valuation. Management have recently announced that they are looking at freeing up some of those properties for sale and lease back some of the tier-three properties. We think it's a pretty good investment right now.

MF: It's interesting you mentioned Ramsay as a stock to buy because earlier you mentioned healthcare as one of the sectors that might be overvalued?

RD: That's right. Yeah, Ramsay has probably been one of the poorest-performing healthcare stocks over that three-year period compared to the big names like CSL Limited (ASX: CSL) and ResMed CDI (ASX: RMD). Mainly because Ramsay was a COVID loser because of all those issues it faced.

MF: Your second buy?

RD: The second one is News Corporation CDI (ASX: NWS). 

It's got about a $10 billion valuation but, to us, it's probably one of the highest-quality businesses on the ASX. 

If we look at News Corp's key assets, it's mainly digital media assets, and the print exposure is quite small and modest. The largest asset that New Corp holds is the 61% holding in REA Group Limited (ASX: REA), which is listed realestate.com.au. That's the number one property classifieds portal in Australia. They've got around a 70% market share and they've got significant amount of pricing power. They're effectively putting up prices by high single-digits, but there's new products that they're rolling out, which they call Premier Plus. It's going to add another 6% to revenue growth. 

So it's a really monopoly-type business that's got high returns on capital, high margins, generates a lot of cash flow, and News Corp owns 60% of [REA], which forms part of the News Corp valuation.

MF: Whenever a fund manager picks News Corp and mentions the REA ownership, readers often ask why wouldn't they just own REA?

RD: We own REA in the fund as well.

If you back out REA's 61% holding from News Corp, basically you're implying an earnings multiple of six times for the rest of the other assets. And those other assets are just as good quality. 

News Corp also owns the Dow Jones business, which is basically the Wall Street Journal, a flagship newspaper. That business has been growing its top line by low double-digits, and about 70% of that revenue is now digital. So it's not as exposed to the traditional advertising cycle as what newspapers used to be. 

And the Journal's a fantastic masthead. The costs are well under control because unlike a Spotify Technology SA (NYSE: SPOT) or a Netflix Inc (NASDAQ: NFLX) where you have to acquire third-party content, the Wall Street Journal creates all its own content through journalists, such as yourself, for example.

The third large business within News Corp is the HarperCollins book publishing business. They are basically the second-largest publisher globally. And it's a pretty stable business. Book sales have been growing at three to 4% per annum, and that's even with audiobook growth and ebook growth. Physical books are still in high demand, but the kicker for HarperCollins is 60% of the revenue comes from the back catalogue. That's titles that have been published many, many decades ago. So it is like an annuity revenue business.

When you back out News Corp's holding of REA, you're actually getting HarperCollins and the Wall Street Journal for about six times earnings. And there's a whole heap of other businesses that they own which aren't that material, such as Foxtel and the Australian newspapers. But the other two businesses are high quality. 

For us, it's undervalued. It's got a good balance sheet. The management team and board have recognised a disconnect between their view of valuation and the market price. Governance is improving and they're looking at ways to increase shareholder value.

MF: I am slightly surprised that your fund owns REA because we think of Schroders as the flag bearer for value investing. Investors don't typically think of REA as a value stock.

RD: Yeah, REA, we recently added to the portfolio. It would've been the third quarter of last year. So it got down to a level of just over $100 or under $100. The stock had really been belted.

What we saw was a multiple which wasn't cheap by any standards, but a pretty decent discount from its historic valuations. And we saw a pretty strong growth profile relative to the rest of the economy. 

So we haven't owned it for long, but there was a moment there in the market sell-off where REA was getting sold off progressively with the rest of the tech sell-off. And to us, REA is a great business. It makes its own in cash. It's pretty durable, which is why it's made its way into the fund.

The post 'Incredibly cheap': 2 'strong' ASX shares expert would pounce on right now appeared first on The Motley Fool Australia.

The fall earnings season is upon us, with many technology and consumer internet stocks reporting their third-quarter results at the end of October. Spotify (NYSE: SPOT), the global leader in audio streaming, released its earnings on Oct. 25. Wall Street was not happy with the report, sending shares down over 10% the following trading day.

Spotify again failed to expand its gross margin and generate a profit in the third quarter of 2022. Should investors be concerned about the music streamer's prospects going forward? Let's take a look. 

Q3 earnings: Strong user growth

Before hitting the troubling parts of Spotify's Q3 results, let's take a look at where the company is executing well, which is the growing popularity of its platform. In the third quarter, Spotify's monthly active users (MAUs) hit 456 million, up 20% year over year. This was a 23 million increase from Q2, a record net addition. Growth is mainly coming from its Rest of World segment, which includes everything that isn't North America, South America, and Europe. Rest of World users are now 26% of overall MAUs, up from just 11% in 2018. 

If this pace of MAU growth continues, Spotify should have no problem reaching its 2030 goal of having 1 billion users on its platform. Generally, 40% of all these new MAUs will translate into premium subscribers for Spotify's ad-free tier. In Q3, premium subscribers grew 13% year over year to 195 million. Premium music subscriptions are the majority of Spotify's revenue today, with the segment generating 2.65 billion euros of revenue last quarter, and should keep growing as long as MAUs grow as well.

Over the long term, Spotify plans to make money in many other ways, including podcast advertising and selling audiobooks. However, these investments are still in the early stages and are not material to the business today.

Margins continue to weigh on the stock

Investors have gotten increasingly frustrated with Spotify due to the lack of gross margin expansion. In Q3, the company had a consolidated gross margin of 24.7%, which is essentially the same as where it was in 2018. Its premium gross margin has ticked up slightly over the last few years due to its song and artist promotional tools, hitting 28% in Q3.

But advertising gross margin has plummeted, reaching only 1.8% in Q3. While only a small part of overall revenue, advertising gross margin has been a big drag on consolidated gross margin in the past few years. 

Why is the advertising gross margin so bad? Because Spotify has invested aggressively to build out its podcast content, advertising, and licensing strategy. This includes buying studios like the Ringer and licensing top shows like The Joe Rogan Experience. These upfront investments have led to great market share gains in podcast listening (Spotify is now the No. 1 player in many markets) but are a drag on gross margin in the short term.  

Spotify has promised gross margin will reach the 30% to 40% range eventually, which will lead to 10% underlying profit margin. To do this, it will need to grow the size of its advertising revenue over its large fixed podcast cost base as well as grow its promotional marketplace at a fast pace. Both of these segments (incremental advertising revenue and promotional tools) have higher gross margin and should be able to drive consolidated gross margin expansion if they become a large enough part of Spotify's overall business.

What the future may hold

I believe there are two scenarios that Spotify could go through over the next couple of years. Looking optimistically, if gross margin starts to finally expand (management says it will happen in 2023), then Spotify could do well over the next decade. At its current market capitalization of $16 billion and with around $12 billion in overall revenue, the stock could trade at a cheap price-to-earnings ratio (P/E) of around 10 based on its current market cap within a few years if net margin reaches 10%. 

More pessimistically, if the promotional marketplace and podcast advertising do not scale to a much larger size, then Spotify will struggle to expand its gross margin, and likely its underlying net profit margin as well. This would be bad news for the stock. 

Coming back to the article title, yes, I do think Spotify investors should be concerned about the company losing money and the lack of margin expansion. If this doesn't get fixed over the next few years as management says it will, then Spotify might not be a worthwhile investment to have in your portfolio.  

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Spotify is still losing money. Should investors be concerned? appeared first on The Motley Fool Australia.

The fund consists of "a high-conviction portfolio of quality global listed equities from a research driven, bottom-up investment philosophy". It's looking for companies that have predictable earnings, low debt, sustainable competitive advantages, organic growth options and experienced and proven management teams. 

The September 2022 monthly update shows the fund has declined 31.8% over the past 12 months. The biggest detractors to performance were some of the largest and most popular global tech stocks.

Even for those of us who are somewhat numb to just how far these fallen heroes have tumbled, when the numbers are laid bare, you see just how brutal this market has been for a number of large-cap tech stocks.

Block (NYSE: SQ) – down 74%

Roku (NASDAQ: ROKU) – down 80%

Spotify (NYSE: SPOT) – down 57%

Meta Platforms (NASDAQ: META) – down 55%

How the mighty have fallen. 

Yet Hyperion are sticking to their guns, confident in what they believe will be a low-growth inflationary environment, that such an environment is best for their investing style.

Hyperion says that while short-term performance has been unpredictable, and acknowledging it has been a difficult period for investors, the fund believes it has allocated capital to businesses that will produce superior long-term results. 

The top five holdings at the end of September were all large-cap US tech stocks, namely Tesla (NASDAQ: TSLA), Amazon (NASDAQ: AMZN), Microsoft (NASDAQ: MSFT), ServiceNow (NYSE: NOW) and Airbnb (NASDAQ: ABNB). Combined, they made up over half the Hyperion Global Growth Companies Fund portfolio.

Hyperion went on to say its "global portfolio continues to produce strong short-term financial results which are consistent with the assumptions that underpin our long-term valuations," saying it believes its portfolio "should perform relatively well in an economic downturn".

The Hyperion Global Growth Companies Fund share price has fallen 31.7% over the past 12 months, in line with the underlying performance of the fund.

The post Tough year for leading global growth fund laid bare with brutal fall in tech stocks appeared first on The Motley Fool Australia.

While ASX investors only had a few Australian stock picks, the raft of ideas for international opportunities was extensive. Investing experts laid down investment opportunities situated in Hong Kong to London and everywhere in between.

What shares are the experts betting on?

Investors will be busy tonight trawling through annual reports and doing research after being bombarded with investment opportunities today. Although, out of the 13 speakers, only three mentioned ASX-listed shares as their highest conviction pick — and out of those three, one was a tip to short shares.

Shares in Flight Centre Travel Group Ltd (ASX: FLT) finished flat today despite Regal Funds chief investing officer Philip King placing a target on the company's back. At the conference, King made his belief known that the company's shares are overpriced considering the trouble it might have ahead of it still. Namely, the pressure it could face by more competitive online travel offerings.

On the other hand, both Megaport Ltd (ASX: MP1) and Pinnacle Investment Management Group Ltd (ASX: PNI) copped rave reviews by Eleanor Swanson and David Allingham respectively. Notably, Swanson named Megaport as "the most exciting tech adventure of this decade". The shares in both ASX-listed companies finished the day higher.

Beyond these top picks for 2022, the industry experts delivered a long list of companies that local investors might not have heard of before. However, as we found out, these obscure investment opportunities might be more familiar than originally thought.

For instance, Qiao Ma's pick of Techtronic Industries Co. Ltd. (HKG: 0669) is the seller of numerous power tool brands including Milwaukee and Ryobi.

All 13 investment opportunities for 2022 revealed

Every stock pick from the Sohn Hearts & Minds Investment Conference is listed below:

Despite the enthusiasm from these stock pickers, a cloud of scepticism was cast by Berkshire Hathaway's Charlie Munger. The renowned longtime investor put some doubt on current market valuations with his commentary, saying:

Some of the valuations we saw in the dot-com era were higher. But overall I consider this even crazier than the dot.com era.

In addition, Munger handed down his grilling critique of cryptocurrency. Warren Buffett's right-hand man said, "I wish they'd never been invented."

All in all, it was an incredibly eventful day. But now, investors have a bigger bank of potential share ideas for the year ahead.

The post Winning shares for 2022: the companies experts are backing revealed at Sohn appeared first on The Motley Fool Australia.

Apple (NASDAQ: AAPL) stock took a hit late last week after a federal judge struck down some of the company's App Store rules regarding how payment systems are managed in apps running on its products (like iPhones and iPads). The court's decision involved a case brought by Fortnite creator Epic Games. While the ruling could hurt Apple, other requested changes Epic was demanding as part of its lawsuit did not get the court's approval. Epic management said it plans to appeal.

The gist if the judge's ruling is that developers are now allowed to send their app's users to outside payment systems from within the app. The ruling does not require Apple to allow users to use Apple's in-app payment system without paying Apple the 15% to 30% commission fee it charges.

App makers, game developers, and companies like Spotify (NYSE: SPOT) have long fought against the 30% fees Apple takes for transactions that take place on iOS devices, arguing that they should be able to use any payment system to sign up customers, rather than exclusively going through Apple's payment system for accounts accessed on Apple devices. 

While there's a chance the rulings that didn't go Epic's way will be overturned upon appeal, the case ended up being a partial win for Apple. It can still collect fees on transactions in its payment system. But the ruling also reinforced a trend that clearly suggests Apple's grip on the App Store is loosening.

Earlier this month, for instance, Apple said it will allow "reader apps" and allow apps to use a single link to sign up customers on their own websites instead of using Apple's payment system. This latest case pushes the envelope further, requiring that Apple has to allow other (outside) payment options for in-app purchases. The impact of changes like this on a growing tech company like Spotify could be profound. 

The Apple tax

Apple takes 30% of any transactions occurring in the Apple App Store or within its ecosystem. That may seem fair on the surface because the transactions are happening via Apple devices, but there are reasons these fees are being challenged in court and even in Congress right now. The basic argument is that Apple has gone too far in its efforts to control how app developers for its devices can make money.

The tech giant's developer rules have long contained "anti-steering" provisions -- essentially, developers were forbidden from even letting their customers know there was a way to pay for their services outside of the App Store. Developers were not allowed to provide a link from within the app, nor could they offer a third-party payment platform. All they could do was ask you to log in to your account, implying that you had to go to their website to sign up for the service. If you've ever downloaded an app hoping to try it only to see a login screen when the app first opens, this is the reason why. 

This developer provision has been particularly problematic for Spotify because the company has a free ad-supported business that it wants to make easy to use for customers. But Spotify ultimately wants customers to sign up for a premium service. To get around Apple's anti-steering rules, the company literally says, "You can't upgrade to Premium in the app. We know, it's not ideal." (see screenshot to the left) 

Apple opened up the "single link" option recently after Japan's Fair Trade Commission started an investigation. But for Spotify, being able to integrate an in-app purchase option that isn't subject to that 30% fee would be a game-changer because it'll make it easier to convert more of its free service customers into paid subscribers. 

Spotify could be leveling the playing field

One big advantage Apple has always had over Spotify is the integration between its software and hardware -- or in this case, between its ownership of the payment system and its ownership of apps like Apple Music and Apple Podcasts. Unquestionably, it's easier to sign up for paid subscriptions to Apple's apps with Apple's form of payment, which is why the company doesn't want apps steering customers to other in-app payment options. 

It isn't just about the 30% fee though. When Spotify was forced to use Apple's payment system, it gave up the ability to gather information about its customers. Apple closely guards information like users' email addresses, demographics, phone numbers, and even street addresses. Spotify could try to collect that data by getting users to sign up outside of the Apple ecosystem or by asking the questions directly, but it was certainly forced to jump through hoops compared to the process for signing up for Apple's own apps. 

If Spotify can make signup and payment simple for new users and collect data directly, the streaming company will not only be able to avoid the 30% fees, it should gain more insights about its users that will help it serve up more effective ads. And that's where Spotify's revenue and profit growth could come from. 

Don't sleep on Spotify

Slowly, Apple's grip on its App Store and payments is being loosened, and that's great news for companies like Spotify. Whether it's in music or podcasts, it has been fighting an uphill battle against Apple's competing apps and payment rules for years. Now that some of those restrictions are being lifted, Spotify may have a chance to build an experience that matches or beats Apple's own offerings. Don't underestimate the impact this could have on Spotify, especially as it spends hundreds of millions of dollars to try to take on Apple in the booming podcasts business. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Apple's epic loss could be a big win for Spotify appeared first on The Motley Fool Australia.

The business is steadily growing

Image source: Spotify.

New initiatives showing promise

Podcasts

Two-sided marketplace

Live audio

The valuation remains reasonable

Time to buy?

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Should You Buy Spotify Stock Before Earnings Next Week? appeared first on The Motley Fool Australia.

ARK is a funds management business over in the United States. Ms Wood is its founder, CEO and chief investment officer. ARK has gained its fame through its suite of exchange-traded funds (ETFs), which specialise in high-growth, future-facing and disruptive companies, usually in the tech space. Ms Wood first rose to fame with her uber-bullish views on some prominent tech shares.

Wood drew a lot of eyeballs a couple of years ago with her unabashedly optimistic views on the electric car and vehicle manufacturer Tesla Inc (NASDAQ: TSLA). Back in May 2019, Cathie Wood surprised even the more bullish investors of Tesla when she spruiked a US$5,905 share price target for the company. At the time, Tesla was a US$40 share (adjusted for last year's stock split). It was also just before Tesla went on its millionaire-minting run. Over the following year or two, Tesla was to shoot up more than 1,100% in value. The fact that Ms Wood was one of the first investors to come out of the gates with such a bullish price target for Tesla earned her and Ark a lot of respect in hindsight.

Growth at scale

But since the days of calling Tesla's success, Cathie Wood and ARK also put some pretty convincing runs on the board. Its flagship fund – the ARK Innovation ETF (NYSE: ARKK) – returned an impressive near-40% in 2019, and almost 150% in 2020. ARK Innovation is a fund that incorporates the 'best ARK picks' from its other, more sector-specific ETFs. Between 1 January 2021 and 12 February, it added another ~25% or so. That's enough performance to catch any investors' eye. Other ARK ETFs performed similarly well, if not better, over these time frames. 

But since February 2021, things haven't been entirely 'coming up Milhouse' for ARK funds. The ARKK ETF has corrected sharply since February when it reached its peak of US$159.70 a unit. On today's pricing, ARKK units are back to US$112.28, giving up more than 28% off of that high.

So is ARK a spent force? Let's take a deeper dive.

What's in an ARK ETF?

Here are the top holdings, and their weightings, in the flagship ARKK ETF, as of 27 May:

As you can see, the fund is heavily weighted to high-growth tech shares. We have Tesla (naturally taking out a large chunk at the top there. But we also have companies like Roku, Square, Shopify, Spotify, Zoom and Coinbase.

These companies are all very similar in nature. They are disruptive, tech-based companies that have long growth runways, and a lot of future potential. But they are also not too profitable today, and still very much in 'growth phase'. These companies are at the stage of their lives where they are prioritising revenue growth over profitability. That's why most of them don't even have price-to-earnings (P/E) ratios yet. Or if they do, they are normally in the triple-digits. Take Tesla. Its P/E ratio is currently sitting at 635.7.

What about some other ETFs?

We see similar patterns in some of ARK's other popular ETFs.

Here are the top ten holdings for the ARK Fintech Innovation ETF (NYSE: ARKF) fund:

And here is what the ARK Next Generation Internet ETF (NYSE: ARKW) fund holds:

Again, very similar businesses – high growth, disruptive, priced for future profitability rather than the money they make today.

So why have ARK funds had a bad few months?

And now we can look at the main problem that these funds face. They tend to do well, really well, when the market is running hot, and growth companies are 'in vogue'. By definition, growth companies tend to outperform the broader markets during a bull run and underperform during a bear market. 2019, and post-COVID 2020 were decidedly the former.

But why the underperformance since February 2020? After all, the US S&P 500 Index (INDEXSP: .INX) has gone and pushed to more record highs since 12 February. Most recently on 7 May.

Well, another factor at play has been fears of inflation and rising bond yields, which have spiked in the months since 12 February. According to CNBC, the US 10-year Treasury yield was well under 1% at the start of 2021 and was around 1.18% on 12 February. This yield reached a high of roughly 1.75% in late March and still stands at 1.61% today.

Rising bond yields typically turn sentiment against companies who are being priced on future earnings, rather than what they offer today. In other words, most of the stocks that ARK funds hold. We saw similar gyrations in our own ASX tech sector between February and May.

What does the future hold for ARK?

The big corrections in the value of Ark funds over the past few months might have dented some of the optimism that many of its investors would have been feeling in the months and years prior. But if the market was once again to fall back in love with the kinds of future-facing tech companies that ARK invest in, it is conceivable that we will see ARK funds back at all-time highs. Time will only tell. But Cathie Wood and ARK are probably not going away anytime soon regardless – as barometers of high-octane growth stock investing if nothing else.

The post An ASX guide to Cathie Wood and ARK Invest ETFs appeared first on The Motley Fool Australia.

The world's largest audio streaming platform, Spotify (NYSE: SPOT), saw its stock price decline by more than 10% at one point in the last week amid announcements for new audio features from Apple (NASDAQ: AAPL) and Facebook (NASDAQ: FB). Since some of these new products are targeted at the podcasting space, investors seem to be worried that the potential added competition could hurt Spotify.

But before Spotify shareholders rush to the exits, it's worth examining whether this is truly important news, or simply investing noise. Let's take a closer look at what was announced and whether it might actually have an effect.

Impending competition

Before diving into why Spotify might be well-positioned to deal with these competitive threats, it's important to understand what the threats actually are. Earlier this week, Facebook announced that it will be introducing several new audio features to its platform. Some of these include short sound bites to share with friends, podcasts, and a live audio product for open discussions.

Although most of these are designed to be social features, Facebook's podcasting product would be a direct competitor to Spotify. With 2.8 billion total monthly active users, it's understandable that investors would fret at the idea of Facebook joining the audio space. But there was more seemingly bad news that followed. 

A few days after the Facebook news dropped, Apple had its spring event, where it announced an array of new products. Alongside new iterations of the iMac and iPad, the company announced that it's revamping its podcast app for the first time in several years and even building a podcast subscription. Although Apple didn't mention any details about possible pricing, the subscription would unlock additional content like ad-free shows and the ability for listeners to support their favorite podcasts financially. 

The updated version would allow podcast creators to set their own pricing and even dictate what additional content their listeners get access to. While this subscription would unlock some new monetization strategies for creators within the Apple Podcasts app, participating podcasts would not have to be exclusive on Apple.  

What does this mean for Spotify?

Though it's clear that competition in the audio space is heating up, some of the announcements will ultimately benefit Spotify as well. Each of these new announcements has the same end goal: boosting the number of listeners on the respective platforms. Regardless of where the end-user listens, Spotify still owns the majority of podcast distribution thanks to its acquisitions of podcasting specialists Anchor and Megaphone.

According to Spotify, Anchor accounts for more than 70% of new podcasts on its platform. While it's impossible to tell what that data looks like on other platforms, Anchor distributes podcasts everywhere, so it's probably fair to assume the data is similar across most apps. So while redirecting the listeners to other apps could potentially hurt Spotify's subscription revenue, the revenue it generates from Anchor and Megaphone would likely grow as more and more advertisers seek the larger podcasting audience. 

Before Apple's announcement, eMarketer reported that Spotify was set to surpass Apple podcast listenership for the first time ever in 2021, and it's likely safe to assume that projection still stands. Spotify has grown its position in the podcasting market not by acquiring existing listeners, but by creating new podcast listeners. A year ago, only 16% of Spotify's total monthly active users engaged with podcast content, and today that number stands at 25%. While Apple's and Facebook's new announcements might garner some attention, it's hard to see Spotify's growth within its existing user base stopping anytime soon.

Is this the time to buy? 

Ever since its inception in 2006, Spotify has endured bumps in the road and heavy competition, and all along the way, it continued to grow its user base. Though these recent announcements could mean increased competition, Spotify has proved itself to be the dominant platform in audio with more than 345 million total monthly active users. 

With its stock now off more than 20% from its highs and trading at its lowest revenue multiple in the last nine months, this strikes me as a good opportunity for long-term investors to add shares. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Despite being extremely early in podcast distribution, Apple (NASDAQ: AAPL) neglected its podcast app for a long time, failing to grow subscriptions, streaming advertisements, or exclusive, high-quality content. That left an opening for Spotify (NYSE: SPOT) to build and acquire the tools necessary to make podcasts a success for listeners and producers alike, potentially making it Spotify's biggest business long term. 

That dynamic changed on Tuesday when Apple introduced subscriptions to its Podcast app. Subscriptions will allow producers to charge listeners directly for their content. It could be an effective way to monetize content, but does it really hurt Spotify's position in the industry? 

Apple's theory of the case 

What Apple is betting on is that easy-to-use subscriptions will be a win-win for producers and listeners. Producers can make money while listeners can get premium, ad-free content. The theory makes sense, but may not be as easy to pull off as you might think. 

Print organizations have proven that paywalls are a tough way to build a business model. The New York Times and a handful of other large organizations have had success moving content behind a subscription paywall, but most who've attempted paywalls have failed. 

The reason why paywalls haven't made sense on the internet is that a free version of the information users might be looking for is likely only a click away. And information travels so quickly that paying for content is a tough ask for consumers. 

Audio may be a little different because the content is unique and consumed differently. A conversation between a podcaster and a guest can't easily be replicated into print or other audio forms like the content of a news article can. So the paywall could work for Apple and podcasters because it's the exclusive place to find the content people are seeking. 

The challenge will be discovery. Free podcasts are easy to find and they open up a world of users to podcast producers. Once a podcast goes behind a paywall there's a lot more friction between users and discovery. 

Spotify is playing a different game

Apple is a big competitor of Spotify in podcasts, but this move may not upend the company's plans. Spotify already has a subscription business in music and exclusive podcasts, and subscriptions to some podcasts may be coming. But I think the biggest opportunity will be building out an advertising business with the user data and advertiser network to make "free" podcasts profitable. 

Podcast production, which Spotify has in its portfolio, is also not dependent on being on Spotify's platform. It has creation tools with Anchor and an editing suite with Soundtrap, just to name a couple of tools. So it's possible that Spotify will make money on podcasts that are made with its tools but distributed through Apple Podcasts. 

Do subscriptions make sense in podcasting at all? 

For creators, it's great that Apple is providing a new revenue option in its podcast business. But the biggest question facing Apple is whether or not subscriptions make sense at all in podcasts. If listeners don't mind a few targeted ads in a podcast, just as they get with radio content, then the subscription model may not generate as much revenue as ad-supported podcasts. 

Aggregation is another thing to think about in podcast subscriptions. Paying one lump sum for access to all podcasts may be appealing, but paying 5-10 subscription fees may be a turnoff. There's a reason music, TV, and now streaming have aggregated content from multiple sources into a subscription and not charged on a per channel or per record label basis. 

There's also the medium that makes podcasts slightly different from any other streaming service to date. Podcasts are a passive medium that you can listen to while working out, driving, or doing almost anything throughout the day. There's no action needed, unlike clicking on an article or actively watching TV. Given the passive nature, ads may not be the end of the world for podcasts. And if discovery outweighs the revenue from subscriptions, I could see an ad model working out better than subscriptions long term.

As an Apple podcast listener, I'm happy to see the company put more attention into audio content. But as a Spotify shareholder, I don't think it's as big a threat as some investors might think. And even if subscriptions are successful, Spotify is small and nimble enough to adapt to the market as it grows, so my money is still on Spotify winning the podcast battle long term. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Apple (NASDAQ: AAPL) recently gave itself a pat on the back when it wrote a letter to recording artists noting it pays a penny per stream on its Apple Music service. That's about twice the rate of Spotify (NYSE: SPOT), the world's largest streaming service.

And while it's leading in its payout rate on a per stream basis, it only pays out 52% of revenue to record labels. By comparison, Spotify pays out about two-thirds of its revenue to labels.

There are a number of factors that enable Apple to pay more per stream to artists while keeping more of its revenue for itself. Here's what investors should consider.

The big difference between Spotify and Apple Music

Spotify offers a free ad-supported tier for listeners, but Apple Music is subscription only. That difference in strategy has a big effect on the rates each service pays to artists and the percentage of revenue those royalties account for.

Spotify has long held up its free ad-supported tier as an important driver of paid subscriptions in the long run. In fact, Spotify contends that offering a free tier prevents listeners from seeking "non-revenue-generating alternatives," which you might just call "piracy."

But there's a drawback to offering a free tier -- less revenue per listener. As of the end of 2020, Spotify had 199 million free listeners and 155 million paid subscribers. But ad-supported revenue in the seasonally strong fourth quarter totaled just 281 million euros versus 1.89 billion euros for the paid subscribers.

Importantly, when Spotify pays a royalty for a listener on its ad-supported tier, it pays it out of the ad-supported revenue. And with 199 million listeners, even if they're less engaged on average than paid listeners, that's going to drag down its average payout per stream.

On the other hand, Spotify's contracts with record labels typically include guaranteed minimums, which means it may have to pay additional royalties if it doesn't generate enough engagement with the service. That could push the percentage of revenue it pays higher on average than its paid tier, where revenue is much more predictable.

Apple doesn't need a free tier

Apple's biggest advantage over Spotify is that it owns the distribution platform. While it's possible to use Apple Music on devices not made by Apple, it's much more common among iPhone owners. And every iPhone comes with Apple Music pre-installed. It's the default music app. Even if you want to listen to music you've already downloaded, you'll use the Apple Music app by default on an iPhone.

That presents a big opportunity for Apple to onboard new subscribers. No need to tempt them with a free ad-supported service. No free tier means Apple's average revenue per user is higher than Spotify's.

What's more, Apple's paid users may not be as engaged as Spotify's paid users. If a Spotify user doesn't use the service as much, they may not mind the occasional ad while listening. As a result, Apple generates more revenue per stream, and it pays out more per stream.

What it all means for investors

For Apple investors, the important number to pay attention to isn't that it pays more per stream than Spotify. It's that it manages to pay out only half of the revenue as royalties. A lower cost of sales, combined with Apple's position as a platform owner, allows it to bundle Apple Music without using it as a loss leader.

Indeed, Apple Music is at the core of Apple's Apple One bundle, which includes all the various subscription services the company introduced over the last half decade or so. That allows Apple to profitably bolster its other services while increasing customer engagement with its services and retaining them as iPhone and Mac users year after year.

For Spotify investors, Apple's relatively low royalty rate is also important. It indicates there's a lot of room for improvement in the company's premium gross margin, which came in at 28.9% in the fourth quarter. There's a big gap between that and the 48% Apple keeps after paying royalties, which accounts for the bulk of cost of sales. Spotify keeps its contracts with record labels short, so it frequently has an opportunity to renegotiate and improve its margins.

Meanwhile, Spotify's investing heavily in podcasts, both as a means to attract new users and to improve its margin for its ad-supported business. If Spotify can bring its ad-supported tier to break-even and raise the margin on its premium tier, it could become tremendously profitable given the scale the tech company's already achieved.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post How Apple can afford to pay twice as much as Spotify for music streaming appeared first on The Motley Fool Australia.

Spotify Technology's (NYSE: SPOT) Stream On event this week gave investors a peek into the company's plans to continue building its podcast business.

Along with new content partnerships, the audio-streaming specialist shared details for new ad technology and podcast creator tools. All three areas are key building blocks in Spotify's podcasting strategy, and they provide meaningful potential for operating leverage and margin expansion.

Investing in more marquee content

Spotify now counts over 2.2 million podcasts on its platform, but only a few dozen really draw listeners to the service. Spotify has made some big investments in original and exclusive podcasts to get users to use its player instead of the competition, and to a large degree it works.

Management says it saw an uptick in user additions, first-time podcast listeners, and engagement when The Joe Rogan Experience became an exclusive in December.

To that end, it announced several new high-profile names it's adding to its podcast lineup, including former US president Barack Obama, Bruce Springsteen, Ava DuVernay, and the Russo brothers. It also revealed new podcasts from Barack and Michelle Obama's Higher Ground production company and gave investors a look at the first podcast from its DC Comics partnership.

There's still a lot of room for Spotify to increase podcast adoption on its platform. As of the end of 2020, 25% of listeners engaged with podcasts on Spotify.

What's more, if those marquee titles are designed to get users to try podcasts, Spotify's newly announced recommendation tools are designed to get them to keep listening.

With a growing library of hundreds of thousands of titles, Spotify has an opportunity to capitalise on the long tail of podcasts on its platform through its ability to recommend content based on everything it knows about its users. That's a big advantage over competing podcast players.

Improving podcast advertising

Spotify is making it easier to buy ads across its entire platform with the introduction of the Spotify Ad Network. Marketers will be able to use Spotify's ad tools to run a campaign that reaches listeners of Spotify's own originals and exclusives, third-party podcasts hosted on Megaphone or Anchor, and its ad-supported music.

Spotify already has a large number of advertisers for its ad-supported music service. Being able to easily migrate them to podcast ad-buying should improve the direct monetisation of its own podcasts while increasing the number of ad offers for its monetisation tools in Megaphone and Anchor. That could help attract more creators to those platforms.

In a move to further increase ad demand in podcasts, Spotify also announced the ability to buy podcast ads through its self-serve platform. The idea is to make purchasing podcast advertisements as easy as buying ads for its core music offering.

Additionally, Spotify confirmed its plans to enable its streaming ad insertion technology on all Megaphone-hosted podcasts sometime this year.

New creator tools to expand the format

Spotify also showed off some new tools it's working on to give creators more ways to engage and monetise their podcast audiences.

It partnered with Wordpress to turn writers into podcasters and vice versa. It's also opening up video for more podcasters this year after testing it with a limited set of creators last year. Podcasters will also have the ability to interact with listeners through polls and Q&A sessions integrated into Spotify's Anchor podcast creation software.

Most interesting is Spotify's plan to allow for subscription podcast content. There are already a lot of subscription podcasts using platforms like Patreon to process subscriptions. The membership platform recently made hosting a subscription podcast easier for creators via seamless integration with many podcast players, but Spotify's platform isn't compatible. Spotify's popularity as a podcast player and a creator tool (Anchor) gives it an opportunity to capitalize on the growing trend and execute better than the competition. And the company could take a cut of subscription revenue while it's at it.

Creating leverage

The important factor in Spotify's podcast business is that content costs don't scale with revenue like they do in its music business. Spotify pays out a certain percentage of its revenue from music listening to labels, musicians, and songwriters.

With podcasts, Spotify can pay for an original or exclusive once and keep all the revenue, producing operating leverage if it can successfully draw an audience to the content. With plans for 1 billion global listeners, it's growing a large pool to draw an audience from for its podcasts.

Even more lucrative is the potential to act as a middleman between podcast creators, advertisers, and listeners. There Spotify can simply collect a fee and it has very low marginal costs once the technology is in place. It's a three-sided network Spotify's developing, and the announcements it made this week should help facilitate its growth with more podcast listening, more discovery, more podcast advertisers, and more third-party creators.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post 3 ways Spotify's investing in podcasts in 2021 appeared first on The Motley Fool Australia.

Spotify Technology (NYSE: SPOT)'s business hasn't skipped a beat amid the COVID-19 pandemic. Its stock price has more than doubled year to date as investors catch on to how meaningfully its podcast investments could pay off over time. 

Let's recap 2020, dive into what's to come, and then determine whether the stock is still a buy.

2020 wrapped

Spotify has had a phenomenal year despite the pandemic. The company's total monthly active users (MAUs) were 29% higher at the end of September versus the prior-year quarter, and the midpoint of management's fourth-quarter guidance suggests more than 26% MAU growth for the year. Within that figure, management expects Premium subscribers to grow 23%.

One of the big stories of the past year has been the company's massive push into podcasting, specifically original and exclusive podcast content. This push began in earnest when Spotify spent 357 million euros ($436 million) to acquire the podcasting businesses Gimlet, Anchor, and Parcast in 2019.

But Spotify took that to another level this year with the acquisition of The Ringer, a podcast and media company started by Bill Simmons. It later signed Joe Rogan's wildly popular program The Joe Rogan Experience to a multiyear deal that went exclusive with Spotify earlier this month. Kim Kardashian West and Michelle Obama were two other huge names that joined the platform in exclusive deals.

This hasn't gone unnoticed by podcast listeners. In 2020, Spotify has overtaken Apple as the most widely-used podcasting platform, according to MIDiA Research. This rapid success has undoubtedly contributed to increasing investor enthusiasm toward the stock.

What's to come

As we look forward to next year, we can probably count on more of the same out of Spotify. That should mean continued MAU and Premium subscriber growth as streaming audio adoption continues in the company's 92 existing markets -- and the service launches in new ones.

For example, Spotify launched in Russia and 12 other European regions last July. And the company just announced this month that the service will be launching in South Korea during the first half of 2021. For Spotify, South Korea is a large untapped market -- one of the last major ones remaining.

In addition, we should expect more original and exclusive podcasting content. As Spotify's user base continues to swell, and a growing percentage of users engage with its shows, the company is also going to have more ad inventory to sell to advertisers. On top of that, its Streaming Ad Insertion technology has the potential to meaningfully increase the value of podcast advertisements, which would boost the company's revenue and profitability.

Yet another opportunity is the potential for price increases in select markets, which management has been telegraphing lately. On the company's third-quarter earnings call, founder and CEO Daniel Ek said users have responded well to price increases in test markets. He went on to state, "So as a result, you'll see us further expand price increases, especially in places where we're well positioned against the competition, and our value per hour is high."

Spotify hasn't traditionally been thought of as a company with pricing power due to the existence of competing platforms like Apple Music, Amazon Music, and others. To the extent that view among investors changes, the company -- and the stock -- should benefit.

Is Spotify a buy?

Spotify stock has had a tremendous run in 2020, beginning the year at $150 per share and closing at $317 as of this writing.

Many investors would look at those gains and conclude they 'missed out', but Spotify still has a tremendous amount of growth ahead of it, both on the top and bottom lines. The podcast advertising initiative can pay off long term thanks to the high profit margins on each incremental ad impression sold. And investors shouldn't overlook the company's opportunity to sell more promotional services to artists and labels. Some of those revenue streams have "software-type margins," according to Ek, which are far higher than the margins in the company's core business.

With a huge global addressable market, margin-enhancing opportunities, and strong prospects for price increases, there's a lot to like at Spotify over the next decade. Investors should still consider the stock a buy despite its triple-digit rally this year.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post 2020 wrapped: Is Spotify stock a buy? appeared first on The Motley Fool Australia.

The pandemic lit a fire under the streaming media sector as people stayed home and streamed more TV shows, movies, and songs. Many of those stocks have already generated big gains for investors this year, but they could surge even higher in 2021 and beyond.

The global video streaming market could grow at a compound annual growth rate (CAGR) of 18.3% between 2019 and 2026, according to Valuates Reports. The global music streaming market could also expand at a CAGR of 17.8% from 2020 to 2027, according to Grand View Research.

Therefore, forward-thinking investors should hold a few promising streaming stocks as that market expands. Here are three solid plays on that secular trend that are still worth buying in 2021: Roku Inc (NASDAQ: ROKU), Netflix Inc (NASDAQ: NFLX), and Spotify Technology (NYSE: SPOT).

1. Roku

Roku is the market leader in connected TV (CTV) devices. It's expected to capture 46.9% of the U.S. CTV market this year, according to eMarketer, thanks to brisk sales of its stand-alone streaming devices and smart TVs. The firm expects Roku's share to surpass 50% by 2022, putting it comfortably ahead of rivals like Amazon.com Inc's Fire TV.

Roku's revenue rose 57% year-over-year in the first nine months of 2020. Sales of its lower-margin players, which generated about 29% of its revenue, grew 40%. Sales from its higher-margin software platform, which generated 71% of its revenue from ads and content distribution partnerships, surged 66%.

During the third quarter, Roku's hardware shipments rose at their fastest rate in over seven years. Its number of active accounts rose 43% year-over-year to 46 million and its average revenue per user (ARPU) grew 20%, but its gross margin contracted as the pandemic throttled its sales of higher-margin ads. 

Roku is unprofitable, and its net loss widened year-over-year in the first nine months. Analysts don't expect it to generate a profit anytime soon, but they expect its revenue to rise 54% this year and another 39% next year.

Roku remains a risky stock, but it isn't terribly expensive at 19 times next year's sales -- especially when tech companies that are generating slower growth are trading at much higher price-to-sales ratios.

2. Netflix

Netflix is the world's largest streaming video platform by paid subscribers. Its total number of paid subscribers grew 23% year-over-year to 195.15 million at the end of the third quarter, as its revenue and earnings rose 25% and 73%, respectively, in the first nine months of 2020. 

Netflix attributes some of that growth to stay-at-home trends throughout the pandemic, but it still expects its revenue and subscribers to both rise another 20% year-over-year in the fourth quarter.

Analysts expect Netflix's revenue and earnings to rise 24% and 52%, respectively, for the full year. Next year, they expect its revenue and earnings to grow another 18% and 44%, respectively -- which are robust growth rates for a stock that trades at 58 times forward earnings. 

Netflix could face tougher competition next year as rivals like Walt Disney Co and AT&T Inc ramp up their streaming efforts. However, Disney and AT&T's streaming platforms aren't profitable like Netflix yet, and Netflix's strong lineup of original content could keep it ahead of the competition.

Moreover, Netflix's latest price hikes (an extra $1 for standard plans and an additional $2 for premium plans in the U.S.) indicate it still enjoys plenty of pricing power against Disney, AT&T, and other challengers. Those strengths all make Netflix a great all-around play on the streaming market.

3. Spotify

Spotify is the world's largest streaming music platform by paid listeners. Its monthly active users (MAUs) grew 29% year-over-year to 320 million last quarter. Its number of paid subscribers rose 27% to 144 million, while its number of ad-supported MAUs grew 31% to 185 million.

Spotify's revenue rose 16% year-over-year in the first nine months of 2020, but high content costs and sluggish ad sales throughout the pandemic throttled its margins and resulted in a net loss.

For the fourth quarter, Spotify expects its revenue to rise 8%-19% year-over-year, its MAUs to increase 11%-27%, and for its gross margin to hold steady. Analysts expect its revenue to rise 41% this year and 22% next year, and for its net loss to narrow next year. 

Spotify's stock more than doubled in 2020, but the stock still looks cheap at five times next year's sales -- likely due to concerns about its lack of profits and competition from tech giants like Apple Inc. 

However, Spotify's stable growth in MAUs and paid listeners indicate there's still plenty of room for multiple streaming music platforms to grow. Its gross margins should expand after the pandemic ends and advertisers ramp up their spending again, while new strategies -- including its recent takeover of the podcast tech company Megaphone and its upcoming expansion into South Korea -- could generate fresh growth. Therefore, Spotify should remain the top "pure play" on the streaming music market for the foreseeable future.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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