Spotify Technologies S.A.

(NYSE: SPOT)

Market Profile SPOT: “Music for EVERYONE”

Recommendation *BUY
Based on the base case scenario of Discounted Cash Flow Valuation and Relative Valuation, I
Current Price $157.49
base a BUY recommendation on Spotify Technologies (SPOT) with a twelve-month target
Target Price $161.88 price of $161.88, a 2.71% upside from its closing price of $157.49 on July 26, 2023. This value
Upside (from 52W High) 2.71% was obtained through the Discounted Free Cash Flow to the Firm Method and Relative
52 Week Low $69.29 Valuation. Despite a 130% downside since the 2021 Bull Run on SPOT and weak current
market situations, we believe the growth in sales will offset its effect and will allow growing
52 Week High $160.80
revenues. Spotify’s low cost of capital and its high market share in the music and podcast
Market Cap (in bn) $30.46 industry allows it to keep creating long-term value despite the fact that the spread between
EPS (TTM) -$4.65 them is expected to be reduced over time.

Source: Yahoo Finance, SPOT DCF Spotify Has Revolutionized How People Consume Music
Spotify is a music streaming service that offers a massive library of music, excellent discovery
features, and great social features. It is different from other music streaming services in a
Target Price Breakdown
number of ways. First, Spotify's library is massive. It has over 82 million songs, as well as a
Year FCFE
large selection of podcasts. This means that you're likely to find anything you're looking for,
Actual 2021 $327 whether it's a new release from your favorite artist or a classic album from the past. Second,
2022 $22 Spotify's discovery features are excellent. The app uses a variety of factors to recommend
2023 $1,124 new music to you, including your listening history, your friends' listening habits, and the
2024 $782 music that's popular in your area. This makes it easy to find new artists and songs that you'll
love. Third, Spotify's social features are top-notch. You can follow your friends, see what
Future 2025 $991
they're listening to, and share your own playlists with them. This makes Spotify a great way
2026 $1,243
to connect with other music lovers and discover new music together.
2027 $1.544
TV $28,002 Spotify has made a big bet on podcasts in recent years. In 2018, the company acquired the
podcasting company Gimlet Media, and in 2019, it acquired Anchor, a podcast creation
Equity Value $33,686 platform. Spotify has also invested heavily in original podcast content, and it now offers a
Shares Out. 195 wide variety of podcasts on its platform. Spotify's venture into podcasts has been successful
so far. In 2022, the company reported that it had over 300 million monthly active users, and
Target Price $161.88
that over half of them listened to podcasts. Spotify's podcast business is expected to continue
Source: DCF Calculations to grow in the coming years.

High Market Share and Dominance in the Industry

Stock Price Movement
Spotify is the leading music streaming service in the world, with a market share of over 30%.
This means that Spotify is used by more people than any other music streaming service.
Spotify's market share has been growing steadily in recent years. In 2016, Spotify had a
market share of about 20%. By 2022, Spotify's market share had grown to over 30%. With
this high and growing market share Spotify has achieved an overall high dominance and
bargaining power in the music industry to the point where artists feel a compulsion to put
their music on the platform. This creates a very high demand-pull for the creators.

Future Concerns and Risks

Source: Yahoo Finance
Spotify is the leading music streaming service in the world, but it is not without its challenges.
Here are some of the major concerns and risks that Spotify faces: Competition from other
music streaming services. Spotify faces stiff competition from other music streaming services,
such as Apple Music, Amazon Music, and YouTube Music. Piracy is still a major problem in
 the music industry, and Spotify is not immune. Spotify has to pay royalties to artists and
Figure 1: Streams – Revenue record labels for every song that is streamed on its platform. These royalties can be
expensive, and they can eat into Spotify's profits. Spotify generates a significant amount of
15,000.0 revenue from its ad-supported freemium plan. However, ad-supported revenue is less
profitable than subscription revenue, so Spotify is always looking for ways to increase its
10,000.0
subscription base. User churn. Spotify's user churn rate is relatively high, meaning that a lot
5,000.0 of users cancel their subscriptions after a few months.

0.0
2018 2019 2020 2021 2022
Premi um Services
Ad-Supported Users
Source: Nasdaq
Business Overview
Spotify's business model is based on a freemium model. This means that users can listen to
music for free with ads, or they can subscribe to a premium plan to listen to music ad-free
and get access to additional features.

Figure 2: Share Ownership % Spotify's revenue comes from two main sources:

• Subscription fees: Spotify's premium plan costs $9.99 per month in the United
15.20
%, 27.63 States. Spotify also offers a family plan that costs $14.99 per month and allows up to
15% %, 6 people to listen to music on the same account.
28%
• Advertising revenue: Spotify generates advertising revenue from the freemium plan.
When users listen to music with ads, Spotify plays ads between songs.

57.17
Spotify's business model is very successful. In 2022, Spotify generated over $11.9 billion in
%,
57% revenue. The company's subscription base has also grown steadily in recent years, and it now
has over 406 million monthly active users.

Insider 2022 Performance Highlights

Shares Hel d by Instituti ons Sure, here are some of Spotify's 2022 financial highlights:
Retail
• Revenue: Spotify Technology annual revenue for 2022 was $12.356B, a 8.02%
Source: Yahoo Finance increase from 2021.
• Subscriptions: Spotify had 406 million monthly active users (MAUs) in 2022, an
Figure 3: Geographic – Revenues increase of 18% year-over-year. Of these MAUs, 182 million were premium
subscribers, an increase of 19% year-over-year.
• Advertising revenue: Spotify generated $1.78 billion in advertising revenue in 2022,
an increase of 9% increase from 2021.
28% 30% • Gross margin: The current gross profit margin for Spotify Technology was 25.0% in
2022, an increase of 1.8 percentage points year-over-year.
• Operating margin: The current operating profit margin for Spotify Technology for
2022 is -6.49%.
• Net income: Spotify's net income was -$0.45 billion in 2022, an increase from -$0.04
21% 21% billion from 2021.

Key Strategies
Europe North Ameri ca
Spotify has implemented a range of strategies to connect hosts with guests and create a
Latin America Rest of World
seamless user experience.

Source: Yahoo Finance ▪ Focus on user acquisition: Spotify is constantly looking for ways to acquire new
users. The company offers a freemium plan that allows users to listen to music for
free with ads, and it also offers a variety of promotional offers to encourage users to
sign up for premium subscriptions.
Senior Management ▪ Improve the user experience: Spotify is constantly improving the user experience of
Daniel Ek its platform. The company adds new features and makes improvements to existing
Founder, CEO, and Chairman of the Board. Ek is a features on a regular basis. This helps to keep users engaged and coming back for
Swedish entrepreneur and investor. He co-founded
Spotify in 2006 and has served as CEO since then. more.
Gustav Söderström ▪ Expand into new markets: Spotify is expanding into new markets around the world.
Co-President and Chief Product & Technology The company is targeting emerging markets with high growth potential, such as India
Officer. Söderström is a Swedish engineer and
and China.
entrepreneur. He co-founded Spotify in 2006 and
has served as Chief Product & Technology Officer ▪ Partner with other businesses: Spotify partners with other businesses to reach new
since 2010.
audiences. For example, the company has partnered with Starbucks to offer Spotify
Alex Norström
Premium to Starbucks customers.
Co-President and Chief Business Officer. Norström is
a Swedish business executive. He joined Spotify in ▪ Invest in original content: Spotify is investing in original content, such as podcasts
2010 and has served as Chief Business Officer since and audiobooks. This helps to differentiate Spotify from its competitors and attract
2016.
new users.
Paul Vogel
Chief Financial Officer. Vogel is an American business
executive. He joined Spotify in 2016 and has served as
Chief Financial Officer since then. Vogel is responsible Corporate Governance and Social Responsibility
for the company's financial strategy and operations.
Dustee Jenkins Corporate Governance
Chief Public Affairs Officer. Jenkins is an American
business executive. She joined Spotify in 2017 and has ▪ Board of Directors: The members of the board have considerable expertise within
served as Chief Public Affairs Officer since then.
the Music & Streaming Industry. The Founder & CEO ( Daniel Ek ) of Spotify is also
Katarina Berg
Chief Human Resources Officer. Berg is a Swedish the Chairman of Board of Directors (which is not good in itself). The chairman of the
business executive. She joined Spotify in 2012 and has board has the power to discipline the CEO, but in Spotify’s case, that cannot happen
served as Chief Human Resources Officer since then.
as it's the same person!
Dawn Ostroff
Chief Content and Advertising Business Officer.
▪ Senior Management: Like the board of directors, Spotify’s senior management, listed on
Ostroff is an American media executive. She joined the left, is comprised of experienced professionals, which ultimately translates into
Spotify in 2020 and has served as Chief Content and greater value creation to the shareholders.
Advertising Business Officer since then.
▪ Audit: internal audit committee that helps oversee corporate accounting and reporting
Seth Farbman
Chief Marketing Officer. Farbman is an American
practices of the Company.
marketing executive. He joined Spotify in 2017 and ▪ Committees: Nominating, Auditing and Compensating exist. This is crucial in a sense of
has served as Chief Marketing Officer since then.
creating independency and transparency between the core business management,
Eve Konstan shareholders and employees.
General Counsel. Konstan is an American lawyer. She
joined Spotify in 2008 and has served as General
Counsel since then. Social Responsibility

Figure 4: Corporate Governance ▪ Climate action: Spotify is committed to reducing its environmental impact. The
company has set a goal of becoming carbon neutral by 2040. Spotify is also working
5.0 Compensation to reduce its energy consumption and waste production.
▪ Civic engagement: Spotify supports civic engagement and voter education. The
Shareholder Rights company has partnered with organizations such as Rock the Vote and Headcount to
10.0
encourage people to vote. Spotify also offers a platform for artists to speak out about
Board important issues.
8.0
▪ Mental health: Spotify is committed to promoting mental health and well-being. The
2.0 Audit company offers a variety of resources for users, including playlists, podcasts, and
articles. Spotify also partners with organizations such as the Jed Foundation and the
1
American Foundation for Suicide Prevention to raise awareness about mental health.
Source: ISS Governance Score
▪ Diversity and inclusion: Spotify is committed to creating a diverse and inclusive
workplace. The company has a number of programs in place to support diversity and
inclusion, including unconscious bias training and mentorship programs. Spotify also
partners with organizations such as the Anita Borg Institute and the National Urban
League to promote diversity and inclusion in the tech industry.
Figure 5: Spotify Churn Rate
Industry Overview and Competitive Positioning
6.00%

5.00%
Potential Impact of 2022 Recession on Music Streaming Industry
4.00% The 2022 recession is expected to have a significant impact on the music streaming industry.
3.00% As consumers tighten their belts, they may be less likely to subscribe to music streaming
2.00% services. This could lead to a decline in revenue for music streaming companies. However,
1.00% there are some reasons to be optimistic about the future of the music streaming industry.
0.00%
Even during recessions, people still enjoy listening to music. And as more people become
2017 2022
connected to the internet, the number of potential music streaming subscribers is likely to
Source: Nasdaq
grow. In addition, music streaming companies are constantly innovating. They are developing
new features and services that make it more convenient for people to listen to music. This
Figure 6: Spotify ARPU could help to offset the impact of the recession.

50 Music Streaming Industry

49
48 49 49 The global music streaming market size was valued at USD 34.53 billion in 2022 and is
47 expected to expand at a compound annual growth rate (CAGR) of 13.80% from 2023 to 2027.
46 47 his growth is being driven by a number of factors, including the increasing popularity of
45 46
smartphones and other mobile devices, the growing availability of high-speed internet, and
44 45
the declining cost of music streaming subscriptions.
43
2018 2019 2020 2021 2022
The music streaming industry is dominated by a few major players, including Spotify, Apple
Source: US Sign House
Music, Amazon Music, and YouTube Music. These companies have invested heavily in
developing their platforms, and they offer a wide variety of features and content to attract
and retain users. In addition to the major players, there are a number of smaller music
Figure 7: Spotify Performance streaming services that are also gaining popularity. These services typically offer more niche
content or specialized features, such as offline listening or social networking. The music
streaming industry is still relatively young, but it is growing rapidly. As the industry continues
to grow, we can expect to see even more innovation and new features.

Churn Rate
Churn rate is the percentage of customers who cancel their subscriptions within a given time
period. It is an important metric for the music streaming industry because it measures how
well a company is retaining its customers. A high churn rate can be a sign of a number of
Source: Yahoo Finance
problems, including: Poor customer service, lack of personalization and high competition. A
Figure 8: Spotify Liquidity Strength low churn rate, on the other hand, can be a sign that a company is doing a good job of
retaining its customers. This can lead to increased revenue and profitability for the company.
1.50
Spotify's churn rate has been declining in recent years. In 2017, the company's churn rate was
1.00 5.5%. In 2022, the churn rate is estimated to be around 3.9%. There are a number of factors
that have contributed to the decline in Spotify's churn rate. These include increasing
0.50 popularity of music streaming, introduction of new features and services, improvements in
customer service and diversification into the podcast streaming industry.
0.00
2018 2019 2020 2021 2022 Average Revenue Per User (ARPU)
Current Ratio Cash Ratio
ARPU, or Average Revenue Per User, is an important metric for the music streaming industry
because it measures how much money a company is making from each user.
Source: DCF SPOT
 Spotify's ARPU (Average Revenue Per User) has been declining in recent years. In 2017, the
company's ARPU was $49. In 2022, the ARPU is estimated to be around $45. There are a
Figure 9: Market Share %
number of factors that have contributed to the decline in Spotify's ARPU. These include
increasing popularity of family plans, growth of ad-supported streaming and rising cost of
Yandex, 2%
Other, 10%
content.
Deezer, 2%
Spotify, 31%
Net Ease, 6%

Youtube
SWOT Analysis
Music, 8%

Key Strengths
Amazon
Music, 13%
Apple Music,
▪ Large user base: Spotify has a large and growing user base of over 480 million active
15%
Tencent
Music, 13%
users. This gives the company a significant advantage over its competitors.
▪ Strong brand recognition: Spotify is a well-known and respected brand. This makes
Source: Statista it easier for the company to attract new users and retain existing users.
▪ Broad content library: Spotify has a vast library of music, podcasts, and other audio
content. This gives users a wide variety of content to choose from.
Figure 10: Spotify’s Debtor Turnover
Ratio ▪ Innovative features: Spotify is constantly innovating and adding new features. This
helps to keep users engaged and coming back for more.
18.0 ▪ Global reach: Spotify is available in over 180 countries. This gives the company a
16.0 global reach that its competitors cannot match.
14.0
12.0 Tackling Weaknesses
10.0
8.0 ▪ High royalty costs: Spotify pays a significant portion of its revenue to artists and
6.0 record labels. This puts pressure on the company's margins.
4.0 ▪ Dependence on third-party content: Spotify relies heavily on third-party content
2.0 from artists, record labels, and podcast creators. This makes the company vulnerable
0.0 to changes in the music industry.
2018 2019 2020 2021 2022
▪ Competition: The music streaming industry is becoming increasingly competitive.
This means that Spotify needs to find ways to differentiate itself from its
Source: DCF SPOT
competitors.
▪ Churn rate: Spotify's churn rate is relatively high. This means that the company is
Figure 11: Spotify’s Profitability losing users at a faster rate than its competitors.

Opportunities for Growth

- 18 - 19 - 20 - 21 - 22
J an J an J an J an J an
▪ Growth in the music streaming market: The music streaming market is growing
0.00%
rapidly. This presents Spotify with an opportunity to grow its business and gain
-5.00%
market share.
-10.00% ▪ Expansion into new markets: Spotify could expand into new markets, such as India
-15.00% and China. This would give the company access to a large number of potential users.
-20.00% ▪ Development of new products and services: Spotify could develop new products
-25.00% and services, such as live streaming or music merchandise. This would help the
company to diversify its revenue streams.
Source: DCF SPOT
Threats to Overcome

▪ Changes in the music industry: The music industry is constantly changing. This could
pose a threat to Spotify if the company is not able to adapt to these changes.
▪ New entrants: New entrants could enter the music streaming market and challenge
Spotify's dominance.
▪ Technological disruption: Technological disruption could make Spotify's business
model obsolete.
Figure 12: Spotify’s Valuation

Target Price Breakdown Competitive Positioning

Year FCFF
Broad Music Catalog
Actual 2021 $327
Spotify boasts an extensive music catalog with millions of songs from various genres and
2022 $22
languages, catering to a wide range of user preferences. This extensive library helps attract
2023 $1,124 and retain a large user base.
2024 $782
Future 2025 $991 Exclusive Content and Podcasts
2026 $1,243 Spotify has been investing in exclusive content and podcast acquisitions, aiming to
2027 $1.544 differentiate itself from competitors. By securing exclusive rights to popular podcasts and
producing original shows, Spotify aims to attract and engage users with unique content
TV $28,002 offerings.

Equity Value $33,686 Cross-Platform Availability

Shares Out. 195 Spotify is available on various platforms, including smartphones (iOS and Android),
Target Price $172.6 computers, tablets, smart speakers, and gaming consoles. This widespread availability
ensures accessibility and convenience for users.
Source: DCF Calculations

EV/SALES Multiple Investment Summary

EVSALES (Industry) 1.2x I issue a BUY recommendation on Spotify Inc. (SPOT) with a one-year target price of $161.88.
SALES (SPOT) $12,355.6 The stock is currently at a downside of 2.58% from its 52W High. This value was obtained
Enterprise Value $14,928.9 through the Discounted Free Cash Flow to the Firm Method and is supported by the Multiples
Valuation Method.
(Less) Debt ($1,226.0)
(Add) Cash $3,529.6 As the economy continues to grow, more people will have excess disposable income to spend
Value of Equity $17,232.4 on entertainment in form of music and podcasts. In the short term, due to the ongoing
Shares Outstanding 192.1 recession fears, there is a possibility of reduction in revenues but in the long-term Spotify has
a positive outlook.
Fair Value per share $89.7

Source: Yahoo Finance, DCF SPOT The music streaming industry faces challenges related to regulatory changes, competition
from other platforms, and the potential impact of economic downturns on entertainment
industry. Despite these challenges, the music streaming industry is expected to continue to
Industry Ratios
grow in accordance with increasing popularity of smartphones and other mobile devices and
Year 2022 Industry Spotify
increasing demand for convenience.
EV to Sales 2.40 7.78
Debt to Equity 0.68 0.02 Discounted Cash Flow Analysis: My base case analysis, with a Discount Rate of 9.47% based
ROAS 3.88 5.54 on Cost of Equity based on CAPM (Capital Asset Pricing Model) and a Terminal FCF Growth
Rate of 2.41%, produced an implied share price of $172.6.
Cash to FV 17.09% 11.20%
Sales to Capital 0.48 1.17 Normalized Operating Profit: Operating Profit has been normalized by using the last 5 years
Operating Margin 20.91% 6.88% of income statement data and median operating profit margins.

Source: Yahoo Finance, DCF SPOT

Current Share Price: At $157.49, Spotify Technology appears slightly overvalued to the
implied intrinsic value from my valuation methodologies.

Other Methodologies: I do not view Precedent Transactions as meaningful due to the overly
broad selection criteria as well as the lack of truly comparables deals; the public markets have
Figure 13: Spotify’s Sales also changed substantially in the past year, and the M&A transactions, many of which are
from 3-5 years ago, do not reflect current market conditions.
15,000.0

10,000.0 Multiples Analysis: At $157.49, Spotify Technologies appears significantly overvalued to the
EV/SALES (Enterprise Value to Earnings before Interest, Taxes, Depreciation and
5,000.0
Amortization) Multiple Analysis.
0.0
Target Price: As a result, I selected $161.88 as my target price for my sell recommendation.
A

A
18

19

20

21

22
20

20

20

20

20 Noting the fact that, the target price is based on 12 months.

Source: Nasdaq
Possible Investment Risks
Figure 14: EBITA & EBIT Margin % Investors must be aware of risks related to investing in Spotify, there are potential risks
associated like include regulatory changes, competition from other sharing economy
10.00% platforms and traditional hotels, dependence on hosts for the supply of accommodations, and
0.00% the potential impact of economic downturns on travel demand. It is important for potential
A A A A A investors to conduct thorough research and seek advice from a financial advisor before
-10.00% 1 8 01 9 02 0 02 1 02 2
20 2 2 2 2 making any investment decisions.
-20.00%
Median EBIT Margin: -1.95%
EBITDA Margin EBIT Margin

Source: Nasdaq

Capital Expenditure
Particulars in millions
2021 $221.2
2022 $445.7
2023 $463.8
2024 $541.5
2025 $633.9
2026 $743.8
2027 $875.0
Valuation methods
Source: DCF Calculations
Discounted Free Cash Flow to Firm Method

Terminal Value The DCF is a forward-looking valuation approach. Therefore, in order to derive the target
Growth Rate *ppty 2.41% price, I build several assumptions in the three main pillars that sustain this method: (1) Free
cash flows, (2) Terminal value, and (3) Cost of capital. I have used the two stage discounted
WACC *ppty 8.35%
cash flow model to estimate the value of Spotify Technologies. The first stage ranges from
FCFE (5th Year) $2,427.3 2023 to 2027 and it is mainly characterized by high growth. Finally, I forecasted the terminal
FCFE (6th Year) $2,485.8 value from 2028 and on.
Terminal Value $41,822.5
(1) Free Cash Flow: To forecast the free cash flow, we made the following assumptions based
PV of Terminal Value $28,002.1
on our analysis:
*ppty means perpetuity
Source: Nasdaq, DCF Calculations a. Sales: were forecasted based on music and podcast industry growth rates and
market share estimates in both the sectors. Ad-supported revenue is expected to
grow at 27.96% CAGR whereas Premium Revenue is expected to grow at 14.19%.
This would result to a $27.15B revenue by the year 2027. This estimate seems
 Cost of Equity reasonable given that Spotify has a track record of doubling its revenue every 5
Risk Free Rate (US) 3.64% years.
Equity Risk Prem. 6.00%
b. Cost of goods sold (COGS): Although, the Company has not been able to lower the
Regression Beta 1.17
Cost of Goods Sold year-on-year in the last 5 years, I believe that the company would
Cost of Equity 10.69% be reducing COGS margins over the next 5 years. This assumption is based upon the
recent focus of the company to reduce its cost of goods sold and achievement of
Source: Investing.com, Aswath Damodaran economies of scale. COGS is hence estimated to reduce gradually from 75% to 67%
by 2027.

After Tax Cost of Debt

c. Operating Expenses (OpEx): is primarily composed of R&D and S&GA Expenses
PT Cost of Debt 9.26%
which has been assumed to be constant at the historical levels of 10.7% and 7.68%
Tax Rate % 24.94% respectively. Based on this, operating income would turn positive by 2024 and
AT Cost of Debt 6.95% continue to increase overtime. This would lead to a 5.24% operating margin by 2027.

Source: DCF Calculation d. Income taxes: the company has $2.2B in tax credits that have been accumulated by
the losses incurred by the company over the past. It has been assumed that the
company would be utilizing these tax credits to pay effectively no taxes in the next 5
Cost of Capital years.
Cost of Equity 10.69%
Equity Weight 67.36% e. Capital Expenditures: of Spotify can be seen as highly corelated with revenues
AT Cost of Debt 6.95% earned by the company. It has been assumed that CAPEX will be done at 3.22% of
revenue (median value of the past 5 years). This is distributed between PPE, Long
Debt Weight 32.64%
Term Investments and Goodwill based on 2022 % breakup of CAPEX.
WACC 9.47%
f. Working capital: To compute the change in working capital necessary to support the
Source: Investing.com, Aswath Damodaran
growth in sales, I analyzed the days of sales outstanding, days of payables
Figure 15: Spotify’s Return Measures outstanding of current assets and liabilities held by the Spotify and compared it to
competitors’ average for the last four years. The company has a stable receivables
Industry Ratios ratio but has a decreasing payables ratio. Therefore, I forecast working capital to
Year 2022 Industry Spotify increase in a linear manner.

EV to Sales 1.2 0.3

(2) Terminal value: I derived the terminal value considering a long-term growth in
EV to EBITDA 5.9 -10.7 perpetuity of 2.41%, which is based on the US risk-free rates (2017: Stable Economy).
EV to Book Value 10.2 1.5 Adjusted beta of 1.12 have been used for TV calculations, which reads to a perpetual
P/B 32.0 11.8 WACC of 8.35%. 2028, FCFE is $2,485.8 which leads to a terminal value of $41,822.5.
Present value of the terminal value can be derived by discounting it with the perpetual
P/S 3.6 2.4
WACC is $28,002.
P/E 28.4 -65.9

Source: Yahoo Finance, DCF Spotify

(3) Cost of capital: I calculated the cost of capital using the Capital Asset Pricing Model
(CAPM) model. I obtained the beta to apply in the CAPM model by regressing the weekly
historical returns of Spotify with the returns of S&P500 from March 2018 to March 2023,
resulting in a levered beta of 1.17. I used the expected return of the 10-year Treasury
bond as the risk-free rate. The Equity Risk Premium is calculated based on weighted
average of the risk premiums based on the locations where Spotify is located and from
where it gets its revenues from. Spotify has a worldwide reach ranging from North
America (accounts to 21% of the revenues), Europe (accounts for 30% of the revenues),
Latin America (accounts for 21% of the revenues) and Rest of the World (accounts for
28% of revenues).
I based pre-tax cost of debt using the link between ratings, interest coverage ratio and default
spread. To the spread obtained depending on the weight of debt, I added the risk-free rate
based on the same assumptions mentioned before. I added the weighted average country
risk premium as mentioned above. I assumed the same for tax rate of 24.95% (based on the
regions of exposure), to derive the after-tax cost of debt.

Relative Valuation
In addition to the DCF, I used multiples to see if it supports my conclusions from the DCF.
The closest competitors were selected in order to obtain the multiples. I used Relative
Valuation using EVEBITDA, EVSALES, EVBOOKVALUE, P/B, P/S and P/E Ratios.

With the current price being $136.9, relative valuation suggests that SPOT is overvalued as
compare to its competitors. With an extremely high market share and market penetration
overvaluation as per RV is expected. With an overall market dominance, investors are willing
to pay a premium for the market leader.

Although Spotify is an undervalued stock, for a long-term investor, the stock does not offer
huge discrepancies to exploit and hence might not be a fit for value investors.

Investment Risks
Legal Risk (LR) | Impact sales, growth rate, and WACC

Copyright infringement: Spotify has been sued by artists and record labels for copyright
infringement. Data privacy: Spotify has been criticized for its data privacy practices. The
company has been accused of collecting too much data about its users and not doing enough
to protect that data. Antitrust: Spotify has been accused of engaging in anti-competitive
behavior. The company has been accused of using its market power to stifle competition from
other music streaming services.

Political Risk (PR) | Impact sales and growth rate

Government regulation: Spotify could be subject to increased regulation by governments
around the world. For example, governments could impose taxes on Spotify's revenue or
require the company to pay higher royalties to artists and record labels. Censorship: Spotify
could be censored by governments that are opposed to the free flow of information. For
example, the Chinese government has blocked Spotify in China. Geopolitical instability:
Spotify could be affected by geopolitical instability, such as wars or civil unrest. For example,
Spotify's operations in Russia were suspended in March 2022 due to the war in Ukraine.

Operational Risk (OR) | Impact sales, growth rate, and COGS

System outages: Spotify's systems could experience outages, which could prevent users from
accessing the service. Data breaches: Spotify's data could be breached, which could lead to
the theft of user data. Cyberattacks: Spotify's systems could be attacked by hackers, which
could disrupt the company's operations. Competition: Spotify faces increasing competition
from other music streaming services. This could lead to a decrease in Spotify's market share
and revenue.

Regulatory Risk (RR) | Impact sales, growth rate and R&D expenses
Intellectual property: Spotify could be sued for infringing on the intellectual property of
others, such as the copyrights of artists or the trademarks of other companies. Liability:
Spotify could be held liable for the actions of its users, such as if a user upload copyrighted
content to Spotify without permission. Regulatory: Spotify could be fined or even shut down
by regulators if it violates the law.

Market Risk (MR) | Impact sales, growth rate, WACC, COGS, R&D, SG&A, and investments

Economic downturn: a recession or other economic downturn could lead to a decrease in

demand for music streaming services. This would hurt Spotify's revenue and profits.
Technological disruption: technological disruption could make Spotify's business model
obsolete. For example, if a new technology emerges that allows users to listen to music
without paying for a subscription, Spotify could be forced to change its business model. New
entrants: new entrants to the music streaming market could pose a threat to Spotify's market
share. For example, Amazon Music and Apple Music have been gaining market share in recent
years. Substitutes: substitutes for music streaming services, such as listening to music on
YouTube or buying CDs, could also pose a threat to Spotify's market share.

Currency Risk (CR) | Impact sales, and COGS, R&D, and investments
Spotify faces currency risk because it operates in multiple countries and generates revenue in
different currencies. This means that the value of Spotify's revenue can fluctuate if the
exchange rates between currencies change.

Fiscal risk (FR) | Impact tax rate and WACC

Spotify has been accused of not paying enough taxes in some countries. The company has
been audited by tax authorities in several countries.
Appendices
Profit and Loss Statement

Balance Sheet
Valuation

Financial Ratios
Cash Flow Statement

Unlevered Free Cash Flow

Revenues Forecast

Long-Term Asset/CAPEX Schedule

Stock Buyback
Sources:
• https://www.statista.com/statistics/653926/music-streaming-service-subscriber-share/

• https://finance.yahoo.com/quote/SPOT?p=SPOT

• https://in.investing.com/pro/XTRA:639/explorer/marketcap

• https://www.marketbeat.com/stocks/NYSE/SPOT/competitors-and-alternatives/

• https://companiesmarketcap.com/spotify/marketcap/

• https://investors.spotify.com/financials/default.aspx

• https://www.macrotrends.net/stocks/charts/SPOT/spotify-technology/financial-statements

• https://s29.q4cdn.com/175625835/files/doc_financials/2022/q1/64ab3809-23ed-4810-856a-eeb4fec9c338.pdf

• https://www.nasdaq.com/market-activity/stocks/spot/financials

• https://investors.spotify.com/home/default.aspx

• https://www.youtube.com/watch?v=6QxA5qBRZxM&t=7793s