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3 factors behind Spotify’s massive listener growth

Spotify (JOB -1.64%) believes it can hit 1 billion users by 2030, and it’s almost halfway there after a stellar 2022.

The leader in streaming music added over 80 million new listeners last year, up 20% and accelerating growth into 2021. Spotify sees particular strength in a few key areas that bode well for the future listener, subscriber and revenue growth of the company promise. Here are three factors behind the company’s massive 2022 and what they mean for investors’ future.

1. Ad-supported

Spotify added nearly 60 million ad-supported listeners over the year.

In fact, strong ad-supported audience results are responsible for virtually all of Spotify’s overall listener growth outperformance. It added just 37 million ad-supported listeners in 2021 and 46 million in 2020.

Spotify often refers to its free ad-supported listeners as “up in the funnel.” That said, it attracts listeners with its free offering and aims to convert them into paying subscribers over time. The strategy has performed very well in the past.

“Every time you see accelerated growth at MAU [monthly active users]which is typically always very good for our business and translates to subscribers over time,” CFO Paul Vogel said during Spotify’s fourth-quarter earnings call.

2. Rest of the world

A growing proportion of Spotify’s total monthly listeners come from the Rest of the World region.

In fact, at the end of 2022, 28% of Spotify’s users were in the “Rest of the World” region, up from 22% at the end of 2021. That suggests that around 47 million of its new users came from the region, which also includes emerging markets like India and Indonesia.

While the streaming service has seen strong growth in new users in the region, the vast majority of those users are still on the ad-supported plan. The share of paying subscribers in the rest of the world increased from 11% to 12% in 2022, representing an increase of about 5 million.

In other words, of the 60 million ad-supported listeners Spotify added in 2022, around two-thirds were from the “rest of the world” region. Up until this point, CEO Daniel Ek warned about the conversion rate from free to paid listeners. “It may take longer in some developing markets than in mature markets,” he said. “But the trend is the same: the longer they stay, the more likely they are to convert.”

3rd Generation Z

In late 2021, Spotify management said it could do better with Gen Z; In 2022 it did just that.

It undertook a concerted marketing effort and product development aimed at a younger audience. Some of its steps include creating or purchasing games like Supergrouper or Heardle, and more social features like Blend playlists, a place to view friends’ activities in the app, and an island within Roblox. It also became a sponsor of FC Barcelona, ​​which management says is a great opportunity to reach a younger audience around the world during its second-quarter results conference call.

The efforts are paying off. Management has pointed to the power of Gen Z listeners in all of its quarterly presentations throughout 2022.

What this means for Spotify investors

All three of Spotify’s biggest growth drivers for listenership will require patience from investors to pay off.

Younger ad-supported listeners from emerging markets are not going to generate much revenue right now. Over time, as their purchasing power improves, they could become valuable subscribers, or at least a valuable source of ad inventory. That should lead to strong sales growth in the future.

Coupled with efforts to cut costs and improve margins, Spotify is poised to achieve positive operating results in the near term. That could be an important catalyst for the stock price to move higher over the long term.

Adam Levy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Roblox and Spotify Technology. The Motley Fool has a disclosure policy.

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