Arch Capital Management, an investment management firm, published its first-quarter 2021 investor letter – a copy of which can be downloaded here. The fund holds a concentrated collection of high-quality businesses purchased at prices where we believe forward returns can exceed a rate of 15% a year. With the fund down 15.3% since inception, the market seems to not agree with its assessments. Try to spend some time taking a look at the fund’s top 5 holdings to be informed about their best picks for 2022.
In its Q1 2022 investor letter, Arch Capital Management mentioned Spotify Technology S.A. (NYSE:SPOT) and explained its insights for the company. Founded in 2006, Spotify Technology S.A. (NYSE:SPOT) is a Stockholm, Sweden-based digital music service provider with a $19.8 billion market capitalization. Spotify Technology S.A. (NYSE:SPOT) delivered a -56.04% return since the beginning of the year, while its 12-month returns are down by -60.29%. The stock closed at $102.87 per share on July 06, 2022.
Here is what Arch Capital Management has to say about Spotify Technology S.A. (NYSE:SPOT) in its Q1 2022 investor letter:
“However, so far, with the fund down 15.3% since inception, the market does not agree with our assessments. The negative performance can be attributed to two stocks in the portfolio, Wix (NASDAQ:WIX)and Spotify (NYSE:SPOT), which have a negative contribution to fund returns of 5.39% and 9.19%, respectively, as of this writing. Take those stocks out and fund returns would be positive since inception.
This isn’t to make an excuse for the fund’s poor returns. We made the choice to buy Wix and Spotify in 2021, and so far the market has punished us for it. But that is in the past. All that we can do right now is evaluate potential investments and our confidence in whether they can produce forward returns of 15% or more.
Our reasoning for investing in Spotify had three fundamental tenets:
- Music streaming subscriptions are a durable industry that will have better unit economics over the next five years than the previous five.
- The company is evolving beyond music to become a global audio platform. In the near term, this will play out through podcast advertising, and over the long term, it opens up tons of optionality for new business models.
- The market has not priced in what this will mean for the business over the next three to five years. We believed this was true when the stock was close to $300 a share, and even more so when it is below $150 a share.
It has only been around a year since our initial purchases of the stock, but so far, parts 1 and 2 of our thesis are proving correct. In 2021, here’s how the premium music business evolved:
-Subscribers grew 16% year over year to 180 million.
-Average revenue per user (ARPU) grew 3% year-over-year in Q4. This occurred because Spotify raised prices in a few key markets. It should be noted that customer churn was stable even with the price increases, according to CFO Paul Vogel on the latest conference call (although they never give out specific numbers).
-Premium gross margin was 29.2% in Q4 2021, up from 28.9% in Q4 2020 and 27.3% in Q4 2018. We expect this positive trend to continue over the next five years…” (Click here to see the full text)
Copyright: dennizn / 123RF Stock Photo
Our calculations show that Spotify Technology S.A. (NYSE:SPOT) fell short and didn’t make it on our list of the 30 Most Popular Stocks Among Hedge Funds. Spotify Technology S.A. (NYSE:SPOT) was in 49 hedge fund portfolios at the end of the first quarter of 2022, compared to 53 funds in the previous quarter. Spotify Technology S.A. (NYSE:SPOT) delivered a -29.37% return in the past 3 months.
In June 2022, we also shared another hedge fund’s views on Spotify Technology S.A. (NYSE:SPOT) in another article. You can find other investor letters from hedge funds and prominent investors on our hedge fund investor letters 2022 Q1 page.
Disclosure: None. This article is originally published at Insider Monkey.
