Spotify Technology SA

Spotify Technology SA, a leading audio streaming platform, is well positioned to further monetize its dominant role in global music distribution and discovery through subscription pricing, advertising, and tiered offerings. Recent results were solid, with paid subscribers reaching 300 million, revenue growth accelerating, and gross margins reaching a record high. While near-term user growth guidance was modestly below expectations, we believe Spotify has significant monetization opportunities ahead as it continues to invest in AI and new product features. We added to the position ahead of the quarter.

Spotify is mentioned as part of the music streaming business within the Communications Services sector, but no specific investment thesis or directional argument is provided regarding its future performance or valuation.

We bought a new holding in Spotify, the Sweden-based (but US-listed) music and podcast streaming subscription platform, which we think is another such company. Spotify has a global subscriber base of over 750 million users whom it is already racing to deepen engagement with faster and more profitably than existing competitors or new entrants. Spotify is using AI to offer new content discovery features, along with new products that enable users to create their own re-mixes and covers of licensed content for sharing within social groups, while preserving the original artists’ rights. Despite steady user, revenue, and earnings growth, Spotify’s share price has sunk along with shares of other software-based businesses, offering a better-valued entry point for investment than any time since the company turned profitable in 2024.

Spotify has a global subscriber base of over 750 million users whom it is already racing to deepen engagement with faster and more profitably than existing competitors or new entrants. Spotify is using AI to offer new content discovery features, along with new products that enable users to create their own re-mixes and covers of licensed content for sharing within social groups, while preserving the original artists’ rights. Despite steady user, revenue, and earnings growth, Spotify’s share price has sunk along with shares of other software-based businesses, offering a better-valued entry point for investment than any time since the company turned profitable in 2024.

Spotify is the world’s largest subscription streaming audio service by market share. The company is committed to retaining talent through several initiatives, including six months of paid gender-neutral parental leave, flexible work environments, and access to therapy and counseling sessions. Additionally, Spotify conducts annual pay-equity reviews to foster an environment in which equitable pay practices are consistently applied. The company is also focused on protecting customer privacy and minimizing regulatory and reputational risk.

While Internet holdings such as Spotify and Shopify have underperformed in recent periods following strong multiyear runs, we believe patience will be rewarded as these unique franchises continue to execute well against large long-term market opportunities. Spotify, in particular, remains a key holding as we see its potential to capitalize on the growing demand for streaming services and its strong user engagement metrics.

While Internet holdings such as Spotify and Sea have underperformed in recent periods following strong multiyear runs, we believe patience will be rewarded as these unique franchises continue to execute well against large long-term market opportunities.

Spotify is included in the portfolio as a significant holding, reflecting its role in the communication services sector. The fund has owned Spotify since 2024, indicating a long-term view on its potential within the entertainment industry.

Spotify, a leading audio streaming platform, is well positioned to further monetize its dominant role in global music distribution and discovery through subscription pricing, advertising and tiered subscription offerings, in our view. We believe the upcoming super-premium tier represents a meaningful catalyst. In its most recent quarter, Spotify delivered solid user growth and operating leverage, with revenue and operating income exceeding guidance. Management highlighted improving gross margin trends and reiterated its confidence in its AI-enabled roadmap, including deeper integration with large language models and continued expansion of its advertising network. While shares declined amid broader multiple compression and concerns around advertising trends, underlying fundamentals are improving.

Spotify, along with other high-quality internet platforms, has seen its stock price decline significantly, primarily due to multiple compression rather than fundamental impairment. The market's current valuation multiples are down approximately 40%, creating a lower bar for these companies to outperform. Despite the market's focus on AI, the best internet companies, including Spotify, are poised to leverage AI to deliver value to consumers. With many of these companies trading at P/E ratios typically reserved for slow-growing businesses, the potential for long-term growth remains strong as long as near-term earnings estimates hold.