I want to love Spotify (SPOT), I really do. It’s a service that I used for a long time. Their integration of music, podcasts, and audiobooks is honestly what I wish Apple would do instead of having Music, Podcasts, and Books as 3 different apps.

Plus, Spotify is a growing video platform that is focused on creator monetization to try and rival YouTube. Not to mention the podcast version of my content is hosted there.

*The Build Invest Live podcast is hosted on Spotify! It’s basically the same content as my YouTube channel…for now.*

Spotify is the type of company that I’m usually very interested in, and the stock price is up over 100% over the last year alone. But the reason why I don’t own the stock is a great lesson in why picking individual stocks can be so hard.

Let’s dive in and I’ll show you what I mean.

On the surface, Spotify has some interesting stats, from their most recent quarter:

Revenue Growth was up 20% YoY
Total Monthly Active Users (both premium and ad-supported) were up 19% YoY
Gross margin expanding YoY

Their outlook for next quarter was good as well with similar YoY growth expected.

*SPOT latest quarter financials from their* *shareholder slides*

Looking at Spotify’s revenue history, it’s been a decade of pretty steady growth.

While there’s a lot to look at on a balance sheet, one of the things I always look at first is net debt. It’s ok if a company has debt, as long as they are being responsible with it. But when a company has zero net debt it’s always a plus. Spotify checks the box there.

*Net debt is negative, which means they effectively have no debt*

Unfortunately, this is where most of the positives end for me as it relates to Spotify.

From a fundamentals perspective, Spotify doesn’t hit all the marks that I usually like to see. Here are a few examples:

Their profits (operating income) are all over the map, and has been negative for 9 out of the last 10 years. However their TTM operating income was their best ever. To be fair, their operating losses are mostly due to the amount of R&D they put back into the business. But still.
In terms of margins, Spotify doesn’t have the same level of profitability as some of their other tech-related peers. Gross margins around 26%, but FC margins are < 5%
While growth is good, the stock is currently trading at about 66 P/OCF (TTM), and even a 38 P/OCF (projected). This is pretty high, especially when you consider it’s very similar to where Nvidia (NVDA) is trading today.
While they don’t have any debt, they’ve been issuing more shares each year, further diluting shareholders (ideally you’d like to see this going down, not up)

Each of those things by themselves aren’t necessarily dealbreakers if you believe in the business. Seeing them all together makes it tougher but that still isn’t the biggest problem for me personally.

The biggest issue with Spotify to me is who their competition is.

If someone asked you who the best, richest, and most powerful companies in the world are, who would you say? I’m guessing names like Apple (AAPL), Google (GOOGL), Amazon (AMZN), and META would come to mind. Unfortunately those are Spotify’s competitors.

Spotify’s platform is good, and their focus on being an all-in-one audio platform with music, podcasts, and now audiobooks is a nice way to try to carve out a differentiated niche. Even if Apple, Google, and Amazon all do those 3 things, they aren’t done as well together with the same level of integration that Spotify is doing.

The question will be…is that enough?

One of the reasons why I ended my Spotify premium subscription is because I was already paying for Apple’s iCloud for storage and Apple TV+ for entertainment. So it made too much sense just to get an Apple One subscription and get music, fitness, and news included too.

Plus, it’s Apple. Apple is arguably the company that is most integrated into my daily life and my family’s lives already. I think a lot of people feel the same or similar way about Google or Amazon too.

That is a tough hill for Spotify to climb. Especially when you consider that my portfolio is heavy with those mega-cap Big Tech companies specifically because I think their moats and overall stickiness is so powerful.

Is there a lesson here?

I said at the beginning that Spotify is a good lesson in why picking individual stocks is so hard. The reason I say that is because it doesn’t meet the criteria that I’ve established for myself:

Their competitive moat is questionable
Their profitability is questionable
Their shares outstanding keep going up, diluting shareholders

But they have a product that I like, and a service that I use and enjoy. Most importantly, the market is currently saying that my criteria doesn’t matter and the stock has doubled in the last year.

This is why picking individual stocks is difficult. We have to be willing to miss out on something because of the rules we’ve set for ourselves. Even when we “like” the company or the market tells us we’re wrong.

We have to be willing to stay disciplined to our standards, and understand that they won’t always be a perfect indicator for success. The hope is that over time they will ensure we pick more stocks that align with our goals than not, but we know they won’t ever guarantee a stock will be a winner.

So depending on your criteria and the type of companies you look for, Spotify may make a lot of sense. If you’re a shareholder already…you’ve been rewarded big time. But it doesn’t fit my strategy, so I’ll pass and I need to be okay with that.

Stock picking isn’t an easy process, but the challenge is what makes it interesting and fun to me. As long as your idea of fun is forcing yourself to miss out on a stock that just doubled over the past year. 🙂

Quick Thoughts

FYI, there will be no Monday video this week, I’ll be enjoying the weekend with the family and things we have planned. I’ll probably post a note on Monday morning with an older video from the channel that most probably haven’t seen.
This Bloomberg Originals video on Google and Sundar Pichai was excellent. I thought Emily Chang asked some very direct and tough questions, which was great. I also that Sundar came across very well in how he responded and handled most of it. While Google isn’t the hot startup anymore and have had plenty missteps of their own, contrasting this to the week Sam Altman had is bullish for Google IMO.
I constantly see articles like this one about the factual inaccuracies in AI-related results. People use these examples as reasons to say AI can’t be trusted or shouldn’t be used. First, it’s early days. It’s going to get better and very very quickly. But still my view is simply that no source of information should be treated as perfect. There’s a phrase I used to tell my team in my corporate career that applies here - “we still have to use our brains.”
If you want more thoughts on markets and stocks throughout the week - consider signing up for my Discord community!
Lastly, if you’re in the U.S. I hope you have a wonderful holiday weekend and get to spend some time with your family and friends. Thank you to all of the servicemen and servicewomen who gave their lives, as well as all of their families who suffered through those losses.

Have a wonderful week, and I’ll see you next Sunday!

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