The following segment was excerpted from this fund letter.
We continue to be impressed with SPOT’s widening moat, long-term strategic thinking and unmatched focus on adding value to its customers' lives. Our thesis on SPOT was discussed in the 2018 annual letter.
In summary, our thesis is rooted in the future monetization of SPOT's non-US market share where its first-mover status still dominates in many of the 79 countries it now operates in. Last quarter SPOT launched in India and added 1 million users in the first week alone.
Our perception is that for the majority of non-North American high-school kids with a mobile phone, Spotify is the primary app they have ever used to access music and podcasts. This is the most undervalued component to the long-term Spotify growth story.
The typical US-centric investor is accustomed to the story of expanding to “rest of the world” once the local market is penetrated. As a Swedish company, SPOT did the opposite. Now in the final stretch of spreading their seed, SPOT appears to be in knife fight with Amazon (NASDAQ:AMZN) and Apple (NASDAQ:AAPL) in the US for subscribers.
Our counterview to the consensus is that outside the US, there is a low probability that Amazon’s new free online music catalogue and Apple’s steaming product (exclusively for Apple devices) is a material threat to Spotify’s two-way marketplace. The US market is important, we get it. But the US market is also plenty big enough for Apple, Amazon and Spotify to co-exist and take share from radio.
SPOT’s enterprise value today implies a rough value of $220 per premium subscriber (vs. $1,400 for Netflix (NASDAQ:NFLX)). This is too cheap considering the lifetime value of customers that are in the very early stages of being monetized. Spotify is profitable, has plenty of cash, has huge insider ownership, and business decisions are being made for the very long term.
SPOT also owns 9% of Tencent Music through a partnership in the early days of playing out. This is a strategic advantage with significant hidden optionality given their combined leverage as the record label industry consolidates and Apple/Amazon spend more to compete in music streaming. SPOT’s publicly listed stake in Tencent Music is worth about $2.3 billion today and probably much more over time.