Takeaway: Leaning Long on SPOT, just waiting on consensus. Moving P from Short to Long Bench since the Labels can't afford a two-horse race.

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SPOT

Last week we laid out our Bull & Bear cases for SPOT (see deck & replay below), with the distinction centering mostly on duration.  On the positive, SPOT has a first-mover advantage with the best competitive advantage in the space; its free tier which is where it acquires most of its subs.  SPOT still has runway for subscriber growth despite both elevated market share & churn, but we believe the biggest opportunity will come from taking price.  SPOT is also in the early inning of ramping its ad business, which still has considerable runway relative to MAU engagement.  Collectively between the two lines, there may be a pathway toward profitability depending on future op-ex investments. On the negative, we're not buying the emerging street conjecture that SPOT is gaining leverage over the Labels since Interactive Music in itself is largely commoditized with limited product differentiation or pricing.  We expect SPOT to remain largely hostage to the Labels, which have limited incentive to give further on royalty rates for far more reasons than otherwise, and likely wouldn’t do so without further restrictions on the free tier. However, we're leaning long since we're not sure when or even if contract negotiations with the Labels will become contentious.  As far as the near-term setup, SPOT tilts bullish since mgmt has neutralized the sell-side by issuing guidance prior to its IPO.  However, we suspect that sell-side initiations still pose a risk since this isn’t a traditional IPO, but that would be a short-term headwind. 

SPOT IPO DECK & REPLAYCLICK HERE


Position Monitor | SPOT & P | Moving to Long Bench - SPOT   TAM slide 

P

We don't think there's much to do on the short side moving forward.  There isn't as much blow-up risk post the Web IV rate hike now that declines in both its ad-supported revenues and users/hours are on the table.  That said, the downside seems limited to a slow bleed/dead money.  The upside is the Labels allowing P to become more competitive given their growing collective risk of concentrating their supplier base around SPOT and AAPL, and the remainder of the Big Tech players that don't need to be in the space.  The Labels have already given P clearance to offer Student and Family plans (expected to launch this summer), which at a minimum should narrow P's competitive disadvantage vs. SPOT while giving it some edge over the Big Tech players who don't have a free-to-consumer tier.  We also suspect the Labels may offer P future concessions on its royalty structure (e.g. lower minimum guarantees) depending on how P approaches Web V deliberations (2020).  Note that P's entire C-suite has completely turned over and its founder barely owns any equity, so P may be operating with a clean slate with the Labels.  However, we're still not fans of the ad-supported model outside of its use as a funnel for the sub business.   By P's own admission, it doesn't have much room to increase ad load, so any ad-supported upside would likely be confined to taking price.  While that's possible given the introduction of Premium Access and expansion into self-serve/programmatic, we see that as a show-me story for now.  Our other concern is consensus estimates, which don't appear to be buying into mgmt's sandbagged guidance beyond the upcoming the quarter.  We're still in the process of vetting estimates.

Position Monitor | SPOT & P | Moving to Long Bench - SPOT   Interactive Music Comp Sheet

Let us know if you have any questions or would like to discuss in more detail.

Hesham Shaaban, CFA
Managing Director


@HedgeyeInternet