Dealmakers in Technology
03 EXECUTIVE SUMMARY
04 SCENARIO OVERVIEW
05 EXPLOSIVE SUBSCRIBER GROWTH
06 PREMIUM SUBSCRIBERS VS. TOTAL SUBSCRIBERS
07 ROOM TO INCREASE MARKET PENETRATION
08 TIMING OF PROFITABILITY
09 NEW CONTRACTS WITH LABELS WILL DRIVE GROSS MARGIN
09 STOCK MARKET INTRODUCTION & LONG TERM VALUATION
10 SPOTIFY VS. APPLE
CONTENTS
200M PREMIUM SUBSCRIBERS / $55BN VALUATION
OUR UPDATED VALUATION THESIS BY 2020
3SPOTIFY: $55 BILLION BY 2020
SPOTIFY UPDATE
Given Spotify’s explosive growth we believe the frm will be valued at $55bn by 2020
Our target stock market introduction valuation for Spotify is over $20bn
Spotify is trending towards 100m premium subscribers by mid-2018 – estimates point
toward 200m by the end of 2020
We expect emerging markets to drive future growth which will likely dilute average revenue
per premium subscriber – we have therefore decreased our ARPPS estimates by 10% to $80
As Spotify’s ambition evolves the company is now seeking to become the third largest player
in terms of advertising – behind Google and Facebook – which will drive ad revenue from
non-premium subscribers
Gross margin will steadily increase due to more benefcial agreements with labels –
estimated levels are consistent with our previous research reports
Premium subscribers as a percentage of total subscribers is estimated to be 40% in 2020 –
slightly below today’s level of 43%
Our valuation reasoning and multiples have not changed since the last report –
subscriber growth has however been stronger than we anticipated
October 2017
EXECUTIVE SUMMARY
TARGET STOCK MARKET INTRODUCTION VALUATION OVER $20BN
OUR UPDATED STOCK MARKET INTRODUCTION THESISStock Market Introduction2020
Implied Market Cap$23 Bn$55 Bn
Premium subscribers (m)70200
Revenue per premium subscriber ($/year)8780
Total premium subscriber revenue ($m)6,09016,000
Non-premium subscribers (m)100300
Revenue non-premium subscriber ($/year)512
Ad revenues ($m)4753,600
Ad revenue (%)7%18%
TOTAL REVENUES6,56519,600
COGS premium subscriber-5,177-12,320
COGS ad revenueus-285-1,800
TOTAL COGS-5,462-14,120
Gross margin17%28%
R&D-460-1,176
R&D7%6%
SG&A-1,313-1,764
SG&A20%9%
EBIT-6692,540
EBIT %-10%13%
Add back D&A66196
D&A1%1%
EBITDA-6032,736
EBITDA %-9%14%
EV/Sales multiple3.5x2.8x
EV/EBITDA multiplen.m.20x
EV22,65054,720
Net debt-2000
Market cap22,85054,720
NOSO FD (M)4.54.5
Share price5,07812,160
RETURN FROM TODAY1.4x3.3x
Implied EV/Revenue3.5x2.8x
Implied EV/Gross proft multiple20.5x10.0x
Implied EV/EBIT multiplen.m.21.5x
SCENARIO
Overview
Source: Annual reports, CapitalIQ, GP Bullhound analysis
Note: ‘return from today’ refers to the return an investor receives if purchasing a share in Spotify at the price of the latest secondary deal