How Financially Spot On Is Spotify?

The Era Of Music-Streaming

Over the decades, music mediums – such as tapes, mini-discs (remember them?), CDs, and now digital downloads - have slowly become less relevant and in many cases obsolete. Streaming however is becoming the savior of the music industry, with Spotify Limited seemingly leading the way.  Its growth is attracting investor interest. According to news reports – also found on S&P Capital IQ®’s key developments - Spotify recently hired Goldman Sachs to raise about $500m which seems to have spurred even more competition as Jay-Z announced the launch of Tidal, a new music-streaming service that will be partially owned by artists. 

As the competition in the music industry heats up, let us have a quick look at Spotify’s financial growth and credit quality.

Spotify Fast Facts

The Growth Story

The growth story is clear. Users have been increasing since launch (see Spotify Fast Facts) and the revenues as well. From 2012 to 2013 Spotify’s total revenue grew 45% from $150.5 million to $217.7 million. Gross profit came from a lower, in fact, negative base in 2009 but now is sitting at a respectable $58 million in 2013; a 118% growth from 2012’s 26.7 million.

S&P Capital IQ Platform, Spotify Limited Latest Financial Report (December 2013). As of 31st March 2015

Source: S&P Capital IQ Platform, Spotify Limited Latest Financial Report (December 2013). As of 31st March 2015 

Credit Quality and Financial Stability

Using S&P Capital IQ’s proprietary credit analytic model called Probability of Default  Fundamentals (PDFN) - used by corporations, banks and insurance companies to assess counterparty credit risk – we analyzed that Spotify has a PDFN of 7.17%*. To put this into perspective, if we took 14 similar music internet companies that had the same probability of default, 1 out of those 14 companies would default in 1 year. Another way to look at such probability of defaults is that a PDFN of 9.637%, or above, would fall into the range of a mapped ‘ccc’ or lower credit score**. Spotify’s PDFN is above this low credit quality. For a growing company it is not unusual to have high leverage and a low Net Worth. Spotify in fact has a negative Net Worth of $22.7 million, which clearly impacts the 7.17% PDFN.

Still In Early Growth Phase

Spotify is still in the early phase of growth. It has successful and mature markets like Britain and France. But Spotify is simultaneously expanding in less developed markets like Mexico, Brazil and Italy, which will most likely take time to translate into significant revenues. Thus far Spotify’s business model has been working and generating increased profit. But with increased competition in the likes of Google, Apple and now Jay-Z’s Tidal, the race for the internet music-streaming king is on.

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* Probability of Default Fundamentals (PDFN) is a proprietary S&P Capital IQ® credit tool which uses financials, country specific risk, industry risk, and a few other factors, to express probability of default as a percentage.

**’ccc’ is denoted in lower-case letters as this is separate from the Standard & Poor’s Ratings Services credit ratings and is derived by a mapping from the S&P Capital IQ® PDFN model

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