Key Morningstar Metrics for Spotify
- : USD 560Fair Value Estimate
- : ★★★Morningstar Rating
- : NarrowMorningstar Economic Moat Rating
- : HighMorningstar Uncertainty Rating
Spotify’s SPOT investor day revealed a slew of upcoming new features and subscription add-ons. The firm all but confirmed a super-premium music tier is coming soon after announcing an agreement with Universal Music, and it shared several ways artificial intelligence will enhance the user experience.
Why it matters: Fears about AI contributed to Spotify’s miserable stock performance over the past year. The deal with Universal will initially allow subscribers who pay an additional fee to use AI to create cover songs or remixes based on works from the Universal artists and songwriters who opt in.
- We expect other major record companies to follow suit and for this feature to evolve into the super-premium tier we’ve been waiting for, a higher subscription tier that includes AI song customization and several other unique features, potentially including some of those just announced.
- AI will also power “personal podcasts,” where users can request customized podcasts by entering prompts to generate unique content. Subscribers will receive credits to use the feature and can pay more for greater access.
The bottom line: We raise our fair value estimate to USD 560 from USD 500. We now see several near-term opportunities to increase monetization per user beyond simple price increases, leading us to project higher revenue growth and greater operating margin expansion, driven by operating leverage.
- The announcements also strengthen our narrow moat rating. In an industry where competitors offer undifferentiated music catalogs and users face no monetary switching costs, new features should differentiate Spotify’s service and make it stickier for subscribers.
Between the lines: Also foreshadowed were enhancements to Audiobooks+, the subscription add-on that provides more audiobook hours than a general subscription; an add-on fitness app, also powered by AI; and Reserved, which will reserve two concert tickets that designated fans can buy at retail price for any announced concert.
