We recently compiled a list of the 10 Best Communication and Media Stocks To Buy According to Hedge Funds. In this article, we are going to take a look at where Spotify Technology S.A. (NYSE:SPOT) stands against the other communication and media stocks.
The global telecommunications industry faces significant growth challenges amidst increasing demand for its essential services. Driven primarily by video traffic, global data consumption across telecom networks is expected to nearly triple by 2027. However, providers are experiencing limited pricing power in commoditized connectivity and data services, with internet access revenues projected to grow modestly at a 4% compound annual growth rate (CAGR) to reach $921.6 billion by 2027. Meanwhile, telecommunications companies (telcos) face substantial costs as they invest heavily in infrastructure to support 5G and other emerging technologies, with an estimated $342.1 billion investment forecasted for 2027 alone. These insights are highlighted in PwC’s inaugural Global Telecom Outlook, which underscores the strategic imperatives for telcos to sustain growth in a competitive landscape. Alongside traditional cost-cutting and optimization efforts, telcos are advised to explore growth opportunities such as IoT solutions, private 5G networks for businesses, fixed wireless broadband for households, and tailored digital infrastructure services for sectors like entertainment, healthcare, manufacturing, and mobility. Embracing these growth areas requires telcos to collaborate effectively within broader ecosystems that are reshaping the industry.
In the business-to-consumer (B2C) sector, telecommunications companies (telcos) are experiencing heightened demand driven by evolving user preferences, particularly as new devices with increasingly data-intensive requirements emerge, largely fueled by video content. By 2027, of the projected 9.7 million petabytes (PB) of data consumption, nearly 7.7 million PB (79%) will be attributed to digitized video content, surpassing all other categories combined. Over the same period, data consumption from traditional communications has grown 104% from 2018 to 2022 due in part to pandemic-related factors, but is expected to increase only 26.8% through 2027. Games represent another significant growth area, with data consumption associated with gaming projected to grow at a 21% compound annual growth rate (CAGR) from 2022 to 2027, driven by the shift towards online and cloud gaming. Virtual reality (VR), fueled by the expansion of the metaverse, is also on the rise, with an anticipated 43% CAGR in VR data consumption over the next five years, accounting for 5% of total data consumption by 2027.
Despite technological advancements and increasing competition, the price of data is declining, impacting internet access revenues which are expected to grow at a modest 4% CAGR to reach $921.6 billion by 2027 from $757.7 billion in 2022, closely tracking global GDP growth. Cellular data is forecasted to be the fastest-growing category, with a 27% CAGR from 2022 to 2027, driven by significant variations in data consumption patterns across regions. In North America, cellular data is projected to comprise 6% of all data traffic, compared to 30% in Asia, particularly influenced by developments in India where the rollout of 5G is expected to catalyze service innovation and subscriber growth, potentially reaching 300 million to 350 million 5G subscribers by 2026. Telecom giants such as Reliance Jio and Bharti Airtel are poised to capitalize on this opportunity by fostering a robust gaming ecosystem and expanding into sectors like healthcare.
Our Methodology
We leveraged Insider Monkey’s comprehensive database of 920 prominent hedge funds to identify the top 10 media and communications stocks with the highest level of hedge fund investment as of Q1 2024. These stocks are listed in order of increasing hedge fund ownership, providing insight into the most popular communication and media stocks among elite investors.
A person wearing headphones listening to an audio streaming service.
Spotify Technology S.A. (NYSE:SPOT)
Number of Hedge Fund Holders: 77
On June 11, Spotify Technology S.A. (NYSE:SPOT) announced that it is set to launch a new premium subscription tier later this year, aimed at its dedicated users. This plan will cost at least $5 more per month and will offer high-fidelity audio quality along with new tools for playlist creation and music library management. Existing Spotify users can opt to add this new tier to their current plan, potentially boosting revenue for the company and its partners. Pricing for the new tier will vary based on users’ existing plans, averaging around a 40% increase, according to sources familiar with the matter. This move follows earlier reports about Spotify’s internal project known as “Supremium.” On June 4, JP Morgan analyst Doug Anmuth increased the price target for Spotify Technology S.A. (NYSE:SPOT) from $365 to $375.
In the first quarter of 2024, the number of hedge funds with stakes in Spotify Technology S.A. (NYSE:SPOT) increased to 77 from 68 in the previous quarter, according to Insider Monkey’s database. The combined value of these stakes is approximately $4.04 billion. Rajiv Jain’s GQG Partners emerged as the largest stakeholder among these hedge funds during this period.
Baron Asset Fund stated the following regarding Spotify Technology S.A. (NYSE:SPOT) in its first quarter 2024 investor letter:
“Another new addition was Spotify Technology S.A. (NYSE:SPOT), a leading global digital music service, offering on-demand audio streaming through paid premium subscriptions and an ad-supported free option. Spotify was among the originators of paid streaming music after the downloads/Napster era, with the Spotify app launching broadly in the early 2010s. Since then, streaming music has grown at a 20%-plus CAGR, and Spotify has been the leading streaming music service both in the U.S. and globally, with more than 600 million monthly average users. We believe that Spotify offers a compelling user experience, which includes algorithmic recommendations and podcasts.
While we have monitored Spotify for some time because of its product leadership and large market opportunity, we believe the last few months have signaled a meaningful positive inflection point for the company. First, Spotify has continued to show that its market is far from penetrated – subscriber net adds accelerated in 2023, even as the product has been widely available for years, thanks to targeted marketing in various countries and new product features. Next, Spotify’s gross margin profile continues to improve thanks to the impact of its artist promotions marketplace, growth in its advertising business, and improved profitability in its podcast offerings.
In addition, management has recently become much more focused on operating discipline, with 2024 expected to be Spotify’s first meaningfully profitable year after operating losses in 2021 and 2022. This has entailed material staff layoffs, restructuring the podcast division, and hiring a new operationally focused CFO. Furthermore, Spotify increased its pricing structure while seeing minimal customer loss, demonstrating the pricing power in its product and the broader streaming music industry. Finally, Spotify has continued to innovate its product roadmap, introducing audiobooks and features like AI DJ that differentiate it from other music streaming providers. We believe that Spotify has the potential to reach more than 1 billion monthly active users, as its global market share increases and music listening habits mature internationally, and we expect its profitability to continue to improve.”
Overall SPOT ranks 3rd on our list of the best communication and media stocks to buy. You can visit 10 Best Communication and Media Stocks To Buy According to Hedge Funds to see the other communication and media stocks that are on hedge funds’ radar. While we acknowledge the potential of SPOT as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than SPOT but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.