The following segment was excerpted from this fund letter.
Back in our 2022 year-end letter, we highlighted Spotify (NYSE:SPOT), which was trading at roughly $15 billion at the time. We asked the question: “Does this valuation make any sense?” Now, just 18 months later, Spotify is valued at about $68 billion – a 4.3x increase. To put this in perspective, we initially estimated a valuation of about $70 billion by 2025, and it seems we got there a bit faster than anticipated.
Spotify went public in 2018 at a price of $132 per share. We began purchasing shares that same year and continued to add to our position as the stock appreciated. Today, Spotify trades at $337 per share, reflecting a total return of 155% since its IPO, or about 16% annually – quite a respectable performance. However, our average cost basis is $216, as we increased our position as the stock rose. As a result, the stock return from that cost basis stands at 58%. While it’s somewhat disappointing in comparison to the overall gain since the IPO, we remain confident in the position we’ve built, given the company’s strong long-term growth and profitability potential.
Spotify’s rise in stock price has been far from a smooth journey. Take a moment to consider the drawdowns since its IPO. Much like Meta, Spotify faced an 80% decline in 2022 – an experience not suited for the faint of heart. We stayed with it…
…and focused on the actual fundamentals of the business, where Spotify performed quite well over time. Active users and premium subscribers have grown at an impressive pace, while both revenues and gross profits have increased at an annual rate of over 20%.
Although the free cash flows have been relatively flat until 2023, the company has recently become a strong cash generator as you can see from the chart below.
Q2 results update (source: company quarterly filings):
Spotify achieved record profitability, reporting a net income of €274 million and a 20% year-over-year revenue increase to €3.8 billion. Gross margins improved to 29.2% – an all-time high – underscoring the company’s efforts to boost efficiency. Premium subscribers grew 12%, reaching 246 million, while monthly active users rose by 14% to 626 million. The company’s operating income surged to €266 million from a loss of €247 million in Q2 2023, reflecting Spotify’s recent focus on cost efficiency and monetization strategies, including a streamlined podcast strategy and enhanced ad revenue initiatives.
The information contained in this letter is provided for informational purposes only, is not complete, and does not contain certain material information about our Fund, including important disclosures relating to the risks, fees, expenses, liquidity restrictions and other terms of investing, and is subject to change without notice. The information contained herein does not take into account the particular investment objective or financial or other circumstances of any individual investor. An investment in our fund is suitable only for qualified investors that fully understand the risks of such an investment. An investor should review thoroughly with his or her adviser the funds definitive private placement memorandum before making an investment determination. Rowan Street is not acting as an investment adviser or otherwise making any recommendation as to an investor’s decision to invest in our funds. This document does not constitute an offer of investment advisory services by Rowan Street, nor an offering of limited partnership interests our fund; any such offering will be made solely pursuant to the fund’s private placement memorandum. An investment in our fund will be subject to a variety of risks (which are described in the fund’s definitive private placement memorandum), and there can be no assurance that the fund’s investment objective will be met or that the fund will achieve results comparable to those described in this letter, or that the fund will make any profit or will be able to avoid incurring losses. As with any investment vehicle, past performance cannot assure any level of future results. IF applicable, fund performance information gives effect to any investments made by the fund in certain public offerings, participation in which may be restricted with respect to certain investors. As a result, performance for the specified periods with respect to any such restricted investors may differ materially from the performance of the fund. All performance information for the fund is stated net of all fees and expenses, reinvestment of interest and dividends and include allocation for incentive interest and have not been audited (except for certain year end numbers). The methodology used to determine the Top 5 holdings is the largest portfolio positions by weight. The top 5 do not reflect all fund positions. The Top 5 can and will vary at any given point and there is no guarantee The top 5 will continue to perform and, more generally, there is no guarantee the fund will meet any specific level of performance. Net returns presented are net of fund expenses and pro-forma performance fees. Rowan Street Capital does not charge fixed management fees. |
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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