There’s a Whole Lotta Love for Music Streaming. Let’s See If My System Loves It Too.
You may have noticed the Led Zeppelin books on the shelf behind me in every Power Trends+ video issue. It’s my favorite band, and their music is a big part of how I taught myself to play the guitar.
We moved a lot when I was growing up, so I never got to develop long-lasting friendships.
I spent a lot of time at home listening to every Zeppelin album, teaching myself how to play along.
I spent hours in my room learning chords, figuring out the correct hand position on the fretboard, strumming and picking techniques, and anything else I could discover. Looking back, I can see the seeds of my investing philosophy taking shape. I was collecting data, analyzing it, throwing out what didn’t work, and keeping what did.
I played in bands, wrote music, and made a living at it (barely) before deciding I could make a lot more money as an investor.
But I still listen to music all the time. I analyze stocks in a quiet room with chill music playing in the background (and two dozing dogs).
On Friday afternoons after the market closes, I often pour myself a bourbon, turn on some jazz… and allow myself to be blissfully bored.
I admit to having a special fondness for vinyl, but I do stream most of the music I listen to these days. And so does everybody else.
So, when my boys told me about Spotify and how it uses A.I. to “recommend” music, I decided to give it a try.
And I loved it. I started listening to an A.I.-curated playlist called “Discover Weekly” a year and a half ago. It’s my daily consumption, and music is on in my house at least 12 hours a day.
Music streaming has come a long way since illegal file sharing applications like Napster and LimeWire. Apple introduced its iTunes store and the iPod in 2001, and streaming services like Pandora, Spotify, and YouTube all launched shortly after in the mid-to-late 2000s.
Despite not being well-received by the music industry, streaming became the dominant revenue generator for music labels in the mid-2010s. And according to the Recording Industry Association of America (RIAA), music streaming now makes up an incredible 84% of the U.S. music industry revenue – a whopping $43.4 billion in 2022 alone.
Global music subscribers surged 26.4% during the pandemic to 523.9 million. The leading platform with the largest number of paid subscribers is Spotify (SPOT), which just reported first-quarter earnings on Tuesday and shot higher as a result.
Let’s take a look at how the most popular music streaming service is doing, both in earnings and in my Quantum Edge system. Then we’ll check in on some other streaming companies.
Spotify (SPOT) Surges After Reporting Earnings
SPOT jumped more than 14% – the most in almost two years – after the company reported record quarterly profits and beat analysts’ expectations. This came after some painful cost-cutting over the past 12 months, including laying off more than a quarter of its workforce.
Paid subscribers rose 14% year over year to 239 million, while total active users – including those on free plans – grew to 615 million. Total revenue increased by 20% and gross margin climbed to 27.6%.
Spotify accelerated growth by modifying its business model to include other entertainment categories, like audiobooks, and by raising prices.
Another price bump is planned for the end of the month. And the company will also offer new tiers to free memberships with ads versus paid models, including one music-only plan with a lower monthly price.
This is all promising and investors clearly like what they heard, but it still may not be a great time to invest in SPOT.
While its Quantum Score of 72.4 does hit my optimal buy zone of 70 to 85, its fundamental ratings are still concerningly low.
Source: TradeSmith Finance and MAPsignals.com
The Fundamental Score is average at exactly 50. One- and three-year sales growth are okay at 16.2% and 17.1%, but the long-term term earnings trend isn’t as favorable with a 315% decline the past three years. And with its recent run, shares are looking overvalued at 60 times future earnings.
On the plus side, SPOT has one-year estimated sales growth of 14.1%, and one-year estimated earnings growth of 41.9%
SPOT also has an impressive Technical Score of 88.2 after its nearly 80% climb the past six months. That’s good stuff, and my system picked up three Big Money buy signals (green bars) over the last 30 days and 10 over the last 90.
Source: MAPsignals.com
I’ll be honest. SPOT is a tough call right now. It’s clearly on the move and its technicals are strong, but that Fundamental Score is at least a yellow flag. Things are estimated to look up, but I like a long-term trend to latch on to.
In the end, I would opt for other stocks that have the fundamental muscle along with Big Money inflows and strong technicals. This is strictly due to the quantitative nature of my process. The idea is to pick the very best of the best.
Are There Better Streaming Opportunities?
I ran a few other music streaming services through my system to see if there were any with the Quantum Edge trifecta we look for.
Spotify leads the pack with most subscribers, but YouTube wins with the most music streams and active users – more than two billion users on this platform.
In October 2006, Google – now Alphabet (GOOGL) – purchased YouTube for $1.65 billion. And while Alphabet and YouTube itself both provide way more than just music streaming services, it’s a great stock to consider.
Source: TradeSmith Finance and MAPsignals.com
As you can see, GOOGL’s scores are strong. At 81, its Quantum Score is right in our optimal buy zone, and the fundamentals rate high enough to drive future profits. The company just reported earnings on Thursday after the close, which caused the stock to surge more than 10% on Friday. That’s impressive for a company valued at more than $2 trillion.
GOOGL beat revenue and earnings estimates and specifically pointed out a strong quarterly performance for YouTube.
Tencent Music Entertainment Group (TME) is the leading online music entertainment platform in China. It provides music streaming, online karaoke, and live streaming services. TME offers several different streaming apps, including QQ Music, which is a joint venture with Spotify.
TME’s use of A.I. is interesting, but may be a little controversial. The company created a “patented voice synthesis technology” that can replicate singers’ voices to create original songs. And they’ve already created the first song by an A.I. singer to be streamed over 100 million times. Feels a little creepy to me.
Like Spotify, TME has a strong Quantum Score at 72.4, but the Fundamental Score of 58.3 is a little too weak for now. My stock analysis system did pick up two Big Money buy signals in the last 30 days and eight in the last 90, so this could be a stock to watch – especially as we see how far those A.I. capabilities go.
I also have to mention Apple Music, Apple’s (AAPL) streaming service. It’s another incredibly popular platform that helped push AAPL to over one billion paid subscribers across all their apps and services, including Apple TV+.
Despite increasing revenue – from $8.3 billion in 2022 to $11.2 billion in 2023 – Apple Music isn’t enough to make AAPL a good investment. Its shockingly low Technical Score of 29.4 pulls the overall Quantum Score down to 41.4, and the fundamentals at 58.3 aren’t enough to make this a worthy contender.
Music streaming is incredibly popular and only continuing to grow – even a vinyl enthusiast like me will listen to Spotify at least once a day. But music stocks seem to be all over the place, and there are better opportunities out there in stronger sectors, like the ones in our TradeSmith Investment Report portfolio.
I’ll be announcing an exciting new opportunity next week. Click here to learn how you can access my stock recommendations today and be among the first to learn about my upcoming new recommendation.
Talk soon,
Jason Bodner
Editor, Jason Bodner’s Power Trends
Disclosure: On the date of publication, Jason Bodner held a position in Alphabet (GOOGL), mentioned in this article.