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A Week of Market Turmoil and a Look at Spotify

It was a rough week for the markets. We had rising Treasury Note yields hurting the NASDAQ while general political uncertainty, inflation fears, and who knows what else caused problems for the Dow. We’ll hit that at the top of the show then we will welcome on Ryan Henderson and Brett Schafer from Chit Chat Money to make the case for owning Spotify. It’s going to be a jam-packed 7investing Now to close the week and, well, for many investors this is a week we’re happy to see go, but remember that when you’re focused on the long-term down weeks eventually become bumps in the road.

October 1, 2021

It was a rough week for the markets. We had rising Treasury Note yields hurting the NASDAQ while general political uncertainty, inflation fears, and who knows what else caused problems for the Dow. We’ll hit that at the top of the show then we will welcome on Ryan Henderson and Brett Schafer from Chit Chat Money to make the case for owning Spotify. It’s going to be a jam-packed 7investing Now to close the week and, well, for many investors this is a week we’re happy to see go, but remember that when you’re focused on the long-term down weeks eventually become bumps in the road.


Sam Bailey  0:15 Welcome to 7INvesting Now, a show that teaches you how to take a long term view on investing by better understanding what’s happening in the market now.

Dan Kline  0:26 Good afternoon Good morning. Good evening Good tomorrow if you’re in Australia. Welcome to 7Investing Now. My name of course is Daniel Brooks Kline, it is October 1. That means the new picks are out if you are a 7Investing member, you get access to all of our new picks this month, our highest conviction stocks. More on that later. I am being joined today by Maxx Chatsko.

We’re going to take a quick look at the rough week for the stock market max. It was a roller coaster, but it was a roller coaster that just goes down. There’s one like that at Universal Studios that goes up up up and then precipitously down but the market is up today we’re going to get to that momentarily. Then we’re going to talk about this wasn’t planned this was kind of breaking news this morning. Merck has a cure for COVID sort of. We’re going to we’re going to get to that. I’m trying so hard to not make jokes about the other things people consider a cure for COVID because people will consider that political so I’m not going to do that. You know, but it does seem to be very promising news as an alternate way if you’ve been exposed to make sure you don’t get hospitalized.

But let’s hit it quickly. Before we get started I’m going to point out that there have been some changes over at Twitter. Periscope was closed and if you’re watching this on Twitter and you send us a comment we don’t see that comment live we’re trying to figure that out with the technology so if you want to watch this on YouTube if you want to watch this at 7Investing.com/live stream, watch it through Facebook if we’re Facebook friends, I’ll share it in my feed at some point it’s probably there any way. You can watch it on LinkedIn I think we might be on Myspace I know we’re working on on being on Tik Tok and being on pretty much every place you can be an I am made for Tik Tok, as you know, Maxx Chatsko I know I am not sadly.

But that said, but so we are we’re doing the best. We appreciate all of you watching. So if we ignore your comment, it’s because we don’t see your comment. And that is the problem. The vast majority of people watch this on Twitter, formerly Periscope. So we know and we’re working on it. But let’s hit the top story here here. That is what went wrong with the stock market this week? It was a down as I said it was a bad week for the NASDAQ and not a great one for the Dow. Maxx, rising Treasury yields were the big reason behind this. There was some debt ceiling stuff. Well, we’ll talk about some of those things maybe a little bit later on. But did anything about Treasury yields or or government squabbling, change your opinion on any of the companies you own?

Maxx Chatsko  2:57 Yeah, no, absolutely not. And you know, at a high level that’s true, right? It doesn’t matter what for the most part right you know, Treasury yields are what’s going on with the debt ceiling or not or what’s going on with Congress or not it’s usually not with this Congress right? But you know, so your thesis is your most important part of investing and obviously those things aren’t going to change your thesis but us saying that me saying that dancing that is not a mandate to completely ignore you know valuations or fundamentals for the companies that you want to own and to buy so you know, at a high level Yes This doesn’t really change much. But you know, I guess also can’t just expect that the markets gonna always go up every month. There are going to be periods where you know, it goes down for some time or sideways or sometimes it goes down by a lot and that’s just part of long-term investing. And especially I’ve said this before, and then a week later the market goes up higher like Dan always says, but you know, eventually by the dip is not going to work. Eventually there’s gonna be some kind of correction or, or a little mini slide or what have you. So just to keep those things in mind. Like Of course, it doesn’t really change much. But you know, you still have to pay attention to fundamentals of things right then.

Dan Kline  4:06 Absolutely. I should point out forgot to tease it a little bit later on in the program. I’m going to have the guys from Chit Chat money on and they they basically try to convince me why Spotify is a buy. I am not a fan. But they did a really good job. Two very, very smart guys, Friends of the program, 7 Investing affiliates, but more importantly, just people we like. But yeah, Maxx, there are going to be crashes. This week, though. And I’ll give an example. Disney’s up I don’t know like $6.50 today like $6.50 and basically that recover is what it was down earlier in the week. What changed for Disney, I guess you could argue that they said they settled the Scarlett Johansen lawsuit.

But it didn’t matter if they gave her 20 million or 200 million. Those are irrelevant numbers. We don’t know what the number is. A lot of guesses are around 40 million, but we don’t know what the number is. And maybe that has some impact on like talent negotiation for them. But when you’re making Avengers and Star Wars movies, you can be a jerk and it doesn’t matter, you’re going to get talent to be in your movie. So nothing changed for Disney. It’s the 50th anniversary starting today. So that doesn’t change anything easy either. And we’ve seen that across a lot of companies and Maxx, the Treasury yield, which everyone got so excited about, do you know what number it almost hit? Have we talked about this?

Maxx Chatsko  5:23 No, is it maybe like one and a half percent or something I

Dan Kline  5:27  One and a half percent. So I understand that there’s safety, and one and a half percent is better than zero. But one and a half percent is I don’t know where that compares to the dividend yield of a lot of, you know, relatively good stocks. But it is not all that relevant. We’re not going to spend a ton of time on the market because Maxx’s right. Long-term trend will happen and there will be reckonings there will be companies that got ahead of their valuation that take a dip that could go for for months if not years.

But right now we’re on this overreact to news we’re like a group of friends reacting to who’s in the wedding party and rumors and that type of stuff where you know, Maxx hates so and so for a week because he thinks he’s getting snubbed and then he finds out that person just missed his text message. Like it is very, very strange I apologize for how ridiculous that analogy is. So let me ask Maxx is there anything you’ve seen over the past couple of weeks that challenges your thesis on any of the companies in your portfolio? Because I’ll certainly say no in terms of me nothing about this including what if we default on our debt which is not going to happen by the way. Nothing changes whether I believe in the companies I believe in

Maxx Chatsko  6:37 Yeah, that’s true. So no for me not so much and again, I’m mostly invest in like drug developers, pre commercial drug developers. But you know what’s going on has affected the companies I recommend here at 7Investing for example, or what companies I’m adding in my own personal portfolio because I do have some companies I’ve known for a while and I think maybe their valuations have gotten a little ahead of themselves so I’ve kind of backed off adding to those positions and I’m adding to other companies that I think don’t have as much maybe valuation risk or just offer a better risk reward for you know, the next 3, 5, 10 years whatever it might be. So again, your thesis can be intact and the company can still be overvalued and that does affect your future return so that’s how I’m kind of approaching what’s going on in the market then.

Now let me ask you something is actually an overreaction i mean i think i don’t know in the context of things when the market goes up so much for so long for such a consistent you know, upward trend and then like the slightest hint of bad news, it goes down or maybe down for a whole week or maybe a little correction I understand what you’re saying it’s maybe not the sky is not falling so you’re right about that but me to kind of sort of make sense that maybe investors are saying like okay, I guess maybe there we also have to consider that stocks do go down every once in a while.

Dan Kline  7:50  It’s the broad strokes that I take issue with and that that segues nicely into how I want to close this segment out. And we would love your questions and comments where we have a taped interview next, but I will be around at the end of the show if you want to comment I know it’s a Friday this is the this is not the most commented show of the week and we are dealing with that Twitter issue. But I wanted to talk a little bit about retail. Why? Because every lousy retailer is going to say oh, we’re having a bad quarter because of supply chains and it’s really hard to get stuff.

You know who doesn’t have issue with supply chains? The absolute best tippy top retailers. Now that doesn’t mean that say Walmart and Amazon or Marshall’s and you know the TJ Maxx companies or Five Below or whoever it is, that doesn’t mean that they’re not going to be out of the specific one something or 10 somethings or 100 somethings. But you’re not going to go to Walmart and be like there’s no pancake mix like like or maybe there could be something completely exclusive like that that’s out but there’s not going to be like there’s no breakfast foods.

Dan Kline  8:45 So a lot of this is just noise and why do I bring this up because retail has fallen across the board. And this is companies and I’ll go back to and I said this to you before the show Maxx. When I ran the toy store. I placed my Lego order a year in advance. And if Walmart wanted my Legos because they were selling more Legos back then Toys R Us wanted my Legos because they were selling more than they expected. You know those Lego order mysteriously didn’t show up? Mine.

The big fish win here and we saw this with Home Depot. We’ve seen this with Costco. The big companies have the ability to like go hire an armada and go out and get their stuff so yeah you go to your favorite supermarket for towels. But when you watch all of these executives and it’s Bed Bath and Beyond that got me irritated because this is a company that’s not particularly well run that that’s that’s shown some signs of life in the last couple of quarters. But everything they sell I can buy someplace else. So maybe the reason their August sales were down were because people bought things other places because they’re not a super relevant brand. And again, when a company does a press conference or explains quarterly results, the CEO always has to say like well, there was a trend like the weather was bad in the north east or we really saw that people were spending their money on this. They never come up and say like, Hey, you know what, I’m not that great at my job. Because you can’t do that you will lose your job. Like, I wouldn’t expect anyone to do that. But you certainly can read between the lines when it comes to some of these things.

Maxx, let’s close out, is there anything else you are watching in the market, I’m trying to disconnect from the daily up and down, which is, of course impossible to do, given how much time we spend researching that you really can’t not see it. And it’s also like, right on my phone. But that being said, Is there anything you’re paying attention to right now?

Maxx Chatsko  10:30 No, I mean, I think this the higher level stuff still is intact, right? You have like, what is the Fed going to do? And that’s going to play out over time, like maybe through the end of 2022? Or even later than that, right? So it’s not like nothing that’s not gonna jump up on us. Of course, there’s always those unknown unknowns, like the Evergrande thing. and China. The markets already kind of, you know, shaking that off. I think so. But no, for the most part, I mean, it’s still steady state, I’m just looking at the company’s eye on making sure they’re executing, making sure those de risking events are falling in my favor, hopefully. And not much has really changed. I mean, you know, there’s always weird macro things, but those tend to take longer to play out, right?

Dan Kline  11:07  They do. And it’s why like, if you believe in a company, it doesn’t really matter what it’s doing right now. And that segues into today is the first of the month. What happens at 7Investing on the first of the month? First of all, it stinks that it’s a Friday, it stinks that it’s a show day, because we have all sorts of things that go out on Friday, all sorts of news. But our new picks come out. What do I mean, when I say our new picks, each one of the seven advisors here at 7Investing, is tasked with coming up with our highest conviction stock pick for the month, and we all wrestle with those decisions.

We’ve then do a write up I believe mine top 3000 words, not that it’s by the word, but so you can dive in and read the whole thing. You could just read the key takeaway, maybe you’ll see my company, and you’ll want to know why now you can search for that. Maybe you’re like, well, I like that company. But what’s their management like? What’s their valuation, you can just jump around to those sections.

Dan Kline  11:56  You’ll also be able to watch the deep dive video presentations. We all make a PowerPoint, we present to the other members of the team and everyone can ask questions. And I’ll say my pick this month is a company you’ve heard of. It is a company you’re going to go oh, I like that company. But should I invest in it? What is Dan’s case for that and I’m going to argue I make a pretty compelling case.

Maxx. His company is not necessarily one you’ve heard of. And we have a very diverse array of picks. JT if you want to share that graphic. So max puts this together every month. This just gives you an overview. We have multiple, there are three very high risk picks. We have my pick which I would consider low risk. Matt Cochrane pick one that’s high risk so they go all over the board. I see some small caps I see some large caps. So if you are coming to 7Investing, and you want to be a member, there is something for everyone.

How do you become a member? That is very simple. You go to 7Investing and JT you take that down, you go to 7Investing.com/subscribe. Once you’re there you fill out a really simple form we ask you your name, we ask you your email address, we ask you for credit card info. That is of course all secure. And you give us either $49 a month or $399 a year which is roughly four months free. You can pick whichever months you consider the free ones maybe it’s December your budgets all stressed out you’re like that’s a free month I didn’t pay that month that is not really how it works. You just pay all at once and we give it to you for that. And if you use code “now” that is n o w you save $10 off your first month, or $10 off on annual subscription. If of course you are a student we have our 85 or $84 a year annual subscription for students. If you are a full-time student and don’t have an email address that works in our system, just shoot us a message at info@7Investing.com.

Not gonna belabor this Maxx I know it is an incredibly busy day for those of you watching. Maxx does a lot of the stuff to get the picks ready. We’re not all necessarily getting every comic corrector putting our photos in the right places or formatting everything. Maxx goes in and does an edit along with Steve Symington. He does some of the work and gets everything ready so when midnight hits on the first or it’s more like 9am these pics can get sent out and when I say 9am I of course mean Eastern the one true time zone. Please don’t send me hate mail if you’re –

Maxx Chatsko  14:27  That’s right this is real life time and yeah if there’s any typos or anything you know who to yell at thanks for Dan for you know channeling anger towards me, yell at me. That’s good. Thanks.

Dan Kline  14:36 I think we’ve all seen my Twitter and know that typos are very likely me. To be fair I am much better at typing on a keyboard than I am at typing on my phone. But Maxx we are going to let you get out of here and I am going to introduce I did a wonderful –

Maxx Chatsko  14:52  Let’s talk about the COVID.

Dan Kline  14:54  Oh dear God I forgot we have another topic.

Maxx Chatsko  14:56  We’re all over the place. That’s fine. We added this last minute sorry.

Dan Kline  14:58  Sorry this is very last minute but I teased it at the beginning, so it’d be very bad if I didn’t do it. So I woke up this morning. To be fair, there were some rumors of this yesterday. But there is a new drug that basically has done so well in trials, that Merck (NYSE: MRK) has gone to the FDA and said, Do we really have to do any more trials? Like I know, that’s not the technical thing that happened.

But Maxx, what is this drug? What does it do? And how might it be a useful tool? No hyperbole if possible, in the battle against COVID, which I picture as looking somewhat like the old Colgate commercials where they fought the cavity creeps. But that is probably before your time. And also not relevant as a way of picturing this. But Maxx, what is Merck done? And what does it mean? Yes, this

Maxx Chatsko  15:39  It is interesting, because Merck came out in the pandemic, and obviously, it’s a big opportunity not only to help people maybe help the world get out of the epidemic, but also, you know, good way to generate some revenues and profits. If you can develop a vaccine or a treatment. We’ve seen that of course, with the with the initial vaccines, there’s going to generate 10s of billions of dollars in revenue this year, also, probably next year as well. Merck actually tried to develop two vaccines and they just weren’t really you know, up to par. Maybe a little too little, maybe a little too late. Developing some other treatments. Maybe they nixed those in clinical trials as well.

But one of the big acquisitions they made relatively early on in the pandemic was a Ridgeback Biotherapeutics. This company makes antivirals, so things that go in and maybe disrupt how viruses can replicate within your body. So it’s kind of adding to what your immune system is already doing, to protect yourself against these infections. So they were developing an oral pill, you take it every day, an antiviral, and this is after you’ve been diagnosed to have COVID. And you take this and maybe it lessens your symptoms, it helps you to avoid having severe disease or maybe ending up in the hospital. And they were running as big long clinical trial testing this oral daily antiviral. And like Dan said, I mean, it works so well that the FDA was like, Hey, why don’t you close this up early, we’re just wanting you to like, you know, submit this for approval, and we’ll go from there.

So they’re hoping to have approval of this daily antiviral that you take by mouth, before the end of the year, they’re gonna maybe have 10 million treatments available. Again, there’s daily dosing, so 10 million treatments is not necessarily treating 10 million people. But this is a really nice arrow in the quiver. Especially we’ve seen like, there’s just for whatever reason, in some parts of the country, there’s lower vaccination rates, but you know, push came to shove, and you did actually get infected, and you didn’t wanna end up in the hospital, this now provides a very easy and convenient way to maybe quite significantly lower the amount of individuals who have severe disease or end up in the hospital. About 50% reductions. So I mean, that could be good for freeing up, you know, beds in the hospital for more serious conditions, things that are not preventable, like COVID is now and maybe even again, like people don’t want to get the vaccine. Fine. We won’t get into that. But now at least you have this very convenient option as well. So this is really good.

Dan Kline  17:51  Dear God, we won’t get into that. But even whether you’ve had the vaccine, you haven’t, and we’re all vaccinated, or at least the two of us are, and we’ve talked about it publicly, or at least I think we have. And so sorry, if I just said something I shouldn’t have. But I think we’ve talked about it publicly. But that being said, so Maxx, if if people get this, and yes, it will be bad to give 10 million people one dose, that would not be very effective. So but if people get this, and we have the number of hospitalizations, that has a bigger effect, right than just keeping half the people out of the hospital. It also frees up care.

So it opens up hospital beds, not just for people with COVID, who need that special attention. But also for like the guy who had a heart attack, or the woman who broke her ankle, or whatever it might be. So if we could have this happen, and half the cases don’t go to the hospital, the actual benefit should be bigger than half right? And I know I’m not expecting you to give an actual number. It’s just sort of anecdotally, there should be longer-reaching effects of this, right?

Maxx Chatsko  18:50 Yeah, exactly. So this is not like one plus one equals two, it’s more like one plus one equals like seven maybe right? This is a very nice thing to have for hospitals in the country. Because the company says it’s relatively easy to manufacture these, I’m not really sure if that’s true antivirals or have some complicated process as well. But if already intended to have like 10 million treatments before the end of the year, then I mean, they did have a long time, maybe get the supply chains in place for you know, some of the really weird reagents you need to make these things that this specific treatment.

So maybe that is believable, and they’re gonna have more available more than 10 million treatments available in 2022. So I mean, this is really nice. And again, it’s more convenient than like, you know, you go to the hospital, maybe you need to take antibody administration because you need to get that through an intravenous infusion that could take an hour or maybe two hours. If you go to a special facility that has that infrastructure. Something like this, I mean, you could literally go to the pharmacy pick it up and then just take it at home right. So this is like really hard obviously –

Dan Kline  19:48  Or better yet, go to a telemedicine appointment get it and have the pharmacy deliver because you have COVID so don’t go to the pharmacy. If you can possibly avoid avoid that. Depending where you Live, there are all sorts of delivery services that for for this type of drug, not for certain controlled substances. But for this type of drug depends where you live, the laws vary a lot by state. This is really encouraging. And when I said to Maxx this morning, I’ll let him go in a second here.

What I said to Maxx this morning is, I’m just amazed by science. The problem with science, not the problem of science. But it’s probably frustrating as a scientist to be working for, like 20 years on something. And you know, amazing advancements have been made, but the right scenario hasn’t come up or you haven’t hit the endpoint. So it’s basically like telling your friends like you’re writing a novel and you know, your novels great, or at least you think it is, but they don’t know anything about it until it’s released. We’ve actually seen just how powerful some things are, you know. We obviously learned that the mRNA platform has the ability to be transformative. And when we see the ability to quickly spin up an antiviral, that could be another tool in controlling this pandemic. Makes me feel good about humanity and I don’t always feel great about humanity. I think that’s like anyone could probably say that.

But Maxx Chatsko, you have work to do. Gonna let you get back to doing that. I totally appreciate you popping in. It is a tough day for the 7Investing team. We are pulled in all sorts of direction. JT if you want to come in just on me. So I’m asking leave without being so obvious. At this point I want to bring up we are going to go to a really interesting interview I did with the guys from Chit Chat money, friends of the family. We’ve had them on the show before. I will point out that we did this interview in late August, right when Spotify reported we had technical difficulties, we finally have the video working I think. So sit back. It’s about 22 minutes long. I will join you at the end. If you have any questions please ask but thank you JT. If you want hit the video.

Welcome back to 7Investing Now as we discussed, Spotify just reported Q2 earnings. And its share price fell after it missed on subscriber totals. Basically, they gave a guidance. They didn’t hit that guidance. I don’t put very much stock into any sort of stock movement right now. Because I feel like with a lot of stocks, people are either looking to pick out one positive thing like wow, hey, this company, like everything’s bad, but they didn’t burn anything down like you know, and then the stock will go up. Or if they’ll cherry pick one bad number. I do think this is a cherry pick of one bad number. But the company did fall right after earnings. It’s recovered some of that, but I wanted to invite our friends from Chit Chat money Ryan Henderson and Brett Schaffer to talk about their long term belief in the streaming music company. Gentlemen, it’s been a while. Welcome back to 7Investing Now.

Brett Schafer  22:38  Yeah, thanks for having us. Thanks, Dan.

Dan Kline  22:41  It is so we are recording this. on a Thursday I’m doing it with a relatively limited amount of sleep. So apologies if I’m not as sharp as usual. But let me just lay out the core case of why I don’t own Spotify (NASDAQ: SPOT). Their basic product is music streaming. Music streaming has a a set price.

You cannot cost more than Apple. You cannot charge more than Amazon. And then there’s dueling people who want money, the labels want their share. And artists are increasingly speaking up and saying, Hey, this is not fair. Now there’s some room in cutting out the label. If you’re Taylor Swift, maybe you could do that. If you’re nobody, you don’t have a label. But everybody in the middle has this pressure. So that’s what I don’t like about Spotify. They don’t have a lot of pricing control. There’s not a lot of margin there. I love the podcast business and they could spin off the podcast business though I think Joe Rogan’s can end up biting them in the in the foot. But if they could spin up the Ringer, and all the other stuff they own. I think that would be a great investable business. But guys, you believe in this company way more than I do? Tell me why I’m wrong.

Brett Schafer  23:43  All right, I’ll hit it first. And yeah, I think you’re right, initially on the music stuff. And that is the majority of their business right now, I guess I’ll probably go through some of the numbers, just forgiving a reference for anyone. So if you look at the financials, and these are going to be in Euros, which is pretty close to the dollar, but their total revenue in Q2. Premium was 2 billion euros and then ad support is 275 million euros.

So the majority of their business right now is from the premium music subscription. And I think you’re right that the the pricing power or excuse me on the pricing power. I think we do disagree on the pricing power part. But the margin side on the premium music subscriptions are not going to expand that much. Although I will say that it has incrementally gone up last quarter, it was at 28.4%. And that is up historically. What is it Ryan down closer to 25%, something like that? And there are it is a bit lumpy. But there is some room there. And yeah, you know, there there’s some troubles with the labels and the artists and stuff like that.

But one reason we really like Spotify is some of the numbers they give out on the music side with the engagement that their users have with the product. So they have two to three times the engagement of say they call it their competitors. When they say that I believe they are meaning Apple Music, YouTube Music, or Amazon Music. And when you hear that, that means they have two to three times the engagement. And then that means though, that when they’re paying out the stream per, you know, paying out the artists, the number that they payout per stream is going to be less, and that looks bad and a headline number. But that number really doesn’t matter because it’s all just based on subscriber pools. And Spotify pays out an increasing amount to the publishing labels. If you look at some of the numbers, they give out, over 870 artists generated $1 million or more from streaming royalties in 2020. And that is up 90% from 2017. Or is a lot of that go into the labels? Yes, but Spotify is increasingly providing value and they’re being what streaming now 62%, I think of all music revenue,

Ryan Henderson  25:58  Yeah, they’ve kind of so I would, I would credit Spotify, to almost all that, but the music revenue in the music industry has returned to growth for like the first time it was declining for what, like 10 years?

Brett Schafer  26:11 Yeah, 10, 15 years because of the pirating and stuff like that, and Spotify was the one that saved them. And we see all that stuff and that might not mean much financially. But two things that may mean, you know, could help financially is one, the discovery marketplace.

They’re doing this thing, where labels basically get gross margin, gross profit kickbacks, for promoting their artists on either the homepage, or by notifications that get popped up or from insertions into Spotify playlists. And a lot of these playlists have really, really, you know, I mean, they’re used everyday by a lot of people you have discover weekly, you got daily drive, rap caviar. I think they give out numbers about I think discover weekly hit like 12 billion listens, or something like that. I could be getting the name of that one wrong. But that is a great way for them to get margins back. Dan yeah sorry,

Dan Kline  27:05 Let me jump in. Because this is a lot like paying for end cap space in a grocery store or paying to be to be on the new and noteworthy table at Barnes and Noble. I’ve talked about what my book was on that table. It’s sold 1000s of copies. And when it wasn’t, it didn’t. But that being said, it still has to be good, right? Because if I’m listening to, you know, whatever, the you know, middle-aged dad-rock playlist on, on Spotify, and all of a sudden, it’s a bunch of stuff I don’t want to listen to, well, they’re gonna lose that pricing power. So there’s a really tough, a really tough negotiation there of taking the money, and making sure the songs would actually be playable on that playlist.

Brett Schafer  27:45 Yeah, one thing I maybe get pushed back on that is that Spotify has been really, really good. And one of the ways we believe they differentiated from the competition is the way they’ve curated listening, and curated artists, for their consumers. And that is the reason you know, I think the proof is there that people use it two to three times more than the competition, so they’re able to find songs for you. Again, discover weekly was the big clear one here. I’ll give one stat here.

So from the discover week, or sorry, excuse me from the two-sided marketplace, they gave out last quarter, the discovery mode, if you use it, they have found over 40% more listeners on average, compared to being on pre discovering more load. And then additionally, 44% of those listeners have never listened to the artists before. So one of the big important, you know, streaming for an artist. It’s not where they make the most of the money, most of the money is made and live shows or other ancillary products like that. So streaming is really for artists discovery, and it can boost, you know, the people that have found you by 40%. That indicates to us that the value is there, and that the two-sided marketplace can be strong. And then there’s one other thing I have, but Ryan, did you have anything else?

Ryan Henderson  28:57  I’d also add that there is it is sort of a commoditized service wrapped in a much better app and a much better experience and more personalization, because they’re getting, and I think the numbers kind of proved that out. I think that 365 million total monthly active users. And I think the second closest was Apple with 70 million of the last.

Brett Schafer  29:18  Yeah, this report. Yeah, it’s hard to compare, because they do not update every quarter. But.

Ryan Henderson  29:22  Yeah, so it’s just I think there is But to your point, there’s always going to be a cap because you have to pay out the rights holders. And so there might be a little wiggle room in there in terms of growing their slice of the pie. But overall, what they’re doing is growing the pie entirely in music, and then am I missing anything on the music side?

Brett Schafer  29:43  No, I mean, the margins aren’t going to be super high, but probably about 30% over the long term. That’s not a terrible business, especially as a subscription. So they can make money on that are they going to have 30% operating margins like some of these other software businesses? No way is that going to happen. But the other thing I’d add is, so a lot of people think that Spotify does not have pricing power.

But they have actually been raising prices in a few markets and churn did not go down overall. Now, they only raised it in a few markets, and they’re testing out some things. So while churn is still falling, and they’re at, they have the ability to raise prices, that indicates to us that they may have more pricing power than you assume. Because at first you think, you know, it is a commodity product, but the customer lock in with these things. You have all your playlists on there, you have all your downloaded songs, they know what type of players they want, they’re feeding you the songs that you want, that we believe in, we could be wrong, and we might, they might not have as much pricing power as we think. But we believe because of that they’re gonna have more, it’s less of a commodity than people assume.

And the ability to raise prices is a lot stronger. Will it be incremental will be not as much as maybe a Netflix? We think that’s the case. But then interestingly, if they raise prices, that is more being paid out to the artists, that is something that can really help improve their relationships with the artists with the labels versus someone like Apple Music if they’re trying to sell it for a cheaper and cheaper price. I hope that makes sense.

Dan Kline  31:15 Yeah. So the optics with the artists are never going to work because Apple can always target the 500 most important artists and throw them throw a concert, pay them to do documentaries. There’s other ways they’re making good. Spotify could do that to a very small point, but they don’t have the they don’t need Apple doesn’t need to make any money on music. It’s just a value add for everything else.

So that to me is tough to compete with. The challenge with Spotify for me, because I think you’re right, I think they have $1 or two of pricing ability where if I’m paying 10.99 for Apple Music versus 12.99 for Spotify, I don’t think I care if I’m a meshed in one or the other. Now for me. I don’t see any differences.

Let me ask you guys the question. So here’s how I discover music. I’m a 47-year-old man, most of my musical tastes developed in college. And now here’s how I discover new musicians. It’s almost always Saturday Night Live. Like, generally whoever the artist is. And there’s usually one or two a year and I’ll give a weird example. Never heard of Olivia Rodrigo until Saturday Night Live because why would I as a 47-yea- old man. And while it’s not my music, you can hear the Taylor Swift in influence. I like the recent Taylor Swift albums. And I get it like I understand it.

But the one I really like –  Machine Gun Kelly was on SNL this year, never heard of him until he appeared, went to listen to his back catalog. It’s all terrible. But his current album is really really good. And its an incredible step forward. I can’t, I’m not listening to discovery whatever, hearing 100 songs hoping I’m going to hear him too. I’m curious at your age, are you guys just like putting on music and, you know, and hearing things? Like even in colleg I just generally just listen to the music my friends told me, you know, that they liked and I liked a lot?

Brett Schafer  33:01  Well, I do. I mean, you do get that, you know, anecdotal people tossing stuff back and forth. But

Ryan Henderson  33:05  I think you’re right, that a lot of the listening habits actually are formed in college. And I think that’s why they discount the college scription. And then, I mean, I guess our habits are probably different. So like my parents, they used to, like, know everything by the album, whereas we just kind of know him by the song. And it usually it’s because it’s lumped in to a playlist that we’re subscribed to.

And then you’re like, Oh, you like that song or you download it and you add it to your own playlist. But as far as the with the pricing power back to that it’s, they give a churn number and if they really usually discount early on, so they can start to slowly incrementally increase prices, as you’ve been with them longer. They’re obviously not going to do that in there, like a brand new market, because that’s probably a bad luck. But I would say we are kind of belaboring the music point. And I think the part of the business that we like the best and it sounds like he liked the best, but maybe it’s because we’re talking our book is the podcast.

Brett Schafer  34:08  Yeah, we are. I wish to be clear that we use one of the assets. Spotify has his Megaphone, we use their marketplace for the advertising. So I guess we have a lot of anecdotal evidence with that as well.

Ryan Henderson  34:20  Yeah, I’ll unless you have any more questions.

Dan Kline  34:23  No, I think this so here’s the thing. I love the podcast business. I thought 400 million or whatever they paid for the Ringer was brilliant. Bill Simmons on his own is probably paying for that deal. And they basically have an endless ability to launch new podcast. Bill Simmons, if you’re listening. There is no finance or stock market podcast on the Ringer or on Spotify of any note, give me a call. But that being said, I think there’s a lot of ability to grow there.

But I do think there’s a cap for that as well where there’s so much competition. Someone like Joe Rogan or what is it called Call Me Daddy, which they just signed up. There’s, again, there’s only so many of those out there. And any of those, like super controversial ones, you’re walking a tightrope, like if you told me tomorrow Joe Rogan said something that Spotify had to cut ties, it wouldn’t shock me. So I wonder a lot about that’s a great business, and they’re the leader in it. I wonder how big that business can be? Give me your thoughts. And we’ll we’ll close out with this.

Ryan Henderson  35:22  Yeah. And so that is part of the, that’s part of the worries there with the podcasting side is sort of what’s the addressable market look like. And it’s worth noting that the Yeah, they own, like the podcast themselves, that’s part of their podcasting strategy, where they have the Ringer, Joe Rogan, Call Her Daddy. And that’s sort of their originals and exclusives, but another part that we like is they own the distribution. So even if Apple podcast grows, its listeners, the amount of users on Apple podcast, they’re making money off that because if, if they’re, if whatever the podcast is, is being distributed on Megaphone or Anchor.

So I don’t know what you guys distribute yours on, but we use Megaphone and they have basically the best and maybe the only ad targeted marketplace that’s automated. And the way to think about that is it’s a bit like a YouTube where we submit where the ad inventory would be, and then advertisers can automatically bid on it. And it just gets inserted. So we don’t have to record that advertisement or anything like that. And so that part is growing right now it’s at about just north of a billion-dollar revenue run rate.

Brett Schafer  36:31  And that is including music.

Ryan Henderson  36:32  That’s Yeah, but it’s, I would say, I’m guessing, mostly podcasts. And so it’s actually growing. So they categorize that as ad-supported revenue. And that’s actually growing 200%, more than 200% organically and 600% for them in organically at north of a billion-dollar revenue run rate. And while it’s hard to put you kind of have to ballpark numbers on it. I think we compare it a bit to linear TV versus smart TVs and the advertisers shifting over where it’s like linear radio versus on-demand audio, we think that’s early in the shift from radio advertisers to on demand audio advertisers. And I think –

Brett Schafer  37:16 While the audience is already over there, so for example, when Rogan pleased to have all his listeners, but they were struggling to get advertisers in 2016, 2017, you’re like, well, how many advertisers are actually on streaming TV? It takes a few years. Now the majority of people in western markets are listening to podcasts now, but the advertising inventory has struggled to get over there. One of the reasons for that is that Apple has been the big winner.

Overall, they basically embedded podcast because it’s iPod podcast, that’s kind of how it started. But they don’t care at all. They just have it through the RSS feed, they give you no data on your shows, well, they give you minimal data. And they also have it download only so it’s really hard to track how well the advertisers are doing. So the reason saying is that advertisers had no incentive to go on to some sort of inventory thing. Apple was not helping them out at all. But Spotify is trying to do that. It might just take a few years.

Ryan Henderson  38:08  And I know I know I gotta go pretty quickly, I guess. But it is a small portion of their business right now. But even in the last conference call, the CEO Daniel Eck said, this is going to be a substantial part of our revenue mix moving forward, the days of it being less than 10% are gone. We see that continuing to grow. We can see advertisers continuing to ship over for podcasts because it’s a better value proposition for them. They can target people based on data, location, listening habits, age, whatever, they’re the data they provide us. So that is probably the crux of our bullishness is the outside of music audio.

Brett Schafer  38:49  Yeah, and I’ll get I’ll add on to more things. Maybe this is something that Megaphone gave us, they have a monthly newsletter. And it’s one of the reasons why we are happy as a Spotify / Megaphone customers. So when we put those when we put those advertising slots in, right now what would you say it’s probably half get filled at best, it’s not nearly as good of a fill rate as YouTube. But last quarter, they said they gave us an update that fill rates had increased 10% CPMs, which is the advertising per 1000, listens, increased 40%. So what people are paying for advertising slot was up 40%. And that is because of Spotify targeting capabilities. And then the number of unique advertisers nearly doubled for some publishers. That’s a bit bad, but still everything’s heading in the right direction.

So even if, say podcasting, advertising doesn’t grow, or sorry, excuse me, podcast listenership doesn’t grow from its existing inventory. Even if they just get the fill rates, basically, from half to full. They get double revenue in that. And there’s also what two or three other strong tailwinds just from overall listenership going up podcast is growing in podcasting itself listenership around the world is growing at a double-digit rate. And then Gosh, what’s the other one?

Oh, listenership on Spotify is growing at like a double-digit rate they’re taking market share from Apple at an impressive rate. And yes, Anchor and Megaphone can get advertisements out to Apple and other places. But the concern is with Apple, you don’t get the data because it’s just downloaded and stuff like that. So the more that’s on Spotify, the more it’s vertically integrated, the higher and higher the CPM rates will go and that means more money for Spotify. It means more money for creators and it means better targeting hopefully for the listeners which and that’s not like a benefit for them or anything like that, but it’s really helping.

Dan Kline  40:41 No absolutely, it’s a benefit. So if you remember the old days of podcasts and you heard me on many podcasts where you know Chris Hill would be touting me undies or whatever the generic you know food service or whatever it was. If I’m listening to something and it targets an ad to me that’s well-targeted it’s something I’m looking for which is not usually the case that ad becomes content I think that’s something Facebook has done really well. Just a couple of notes as we close out here. There is more advertising moving to digital television, but it’s not moving from linear television.

It’s important to note that advertising rates post-pandemic are actually up on linear television and they’re very up in sports. So there’s just more effectiveness to it so there’s more dollars where we’re losing dollars is a local radio market there’s very little actual local radio if you don’t live in a major city so companies that used to be obvious – when I used to run a toy store we advertise on our local radio station that old guys who build models you know like to listen to. And then when that stopped being a live thing and started being a syndicated programming well we ran cable ads on the History Channel because that’s what old guys who build models are watching sorry people who I’m stereotyping but that’s how we that’s how we targeted our ads. So I do think this is all going to get bigger but guys explained to me all of these seem like relatively tight margins with with growth but not massive growth. So why Spotify and not Disney or Apple and I and I’m gonna guess you probably both own both of those also. So that’s a terrible example.

Brett Schafer  42:17  But I get no I get I get what you mean there the so the podcast advertising margins are very, very high. You don’t see that on the income statement right now. But Spotify itself, they’re guiding for 20 to 40% of, excuse me revenue to be coming from advertising over time, and if and there guy for gross margins to get up to 40%, which isn’t crazy high. But that’s with the premium subscriptions at 30% margins max. So well with the gross margins and that’s not true profitability are a lot higher on podcasting. And I think people see right now because ad supported –

Ryan Henderson  42:57  So content costs, all content costs, like podcasts related content cost gets lumped into the cost of revenue under ad supported. So it’s not really representative of the profitability of their podcast side. You run a podcast. Costs are basically a microphone and maybe a Zoom subscription. It’s very high margin just naturally that’s just the type of business that it is. And then so the podcast they own the originals an exclusive or high margin and then the the ad platform that they own has a 50% take rate and it doesn’t there’s very little variable costs. They are essentially just garnering money every time an advertiser bids on ad inventory. So it really is I think it’s masqueraded by the content costs but I think underneath it’s a really profitable business

Brett Schafer  43:47  And then add some risk because you have to not look at what Spotify is doing right now and you have to kind of put on some rosy colored glasses and say Alright, this is what it can look three to five years from now and I will caveat that that does add some risk. But if you believe in that and we believe that you can see it from you know what they’re doing and how they’re really eating market share from Apple and no one else is focusing on audio this heavily with that that’s the that’s the bet we’re willing to make.

Ryan Henderson  44:17  But again, we’re biased because we have a podcast Yeah, that’s

Dan Kline  44:20  Yeah, that colors my thinking as well. Ryan Henderson, Brett Shaffer. Thank you for doing this I have so many more questions but we’ll ask them off here after we stop this so we don’t go on too long. I will now throw it back to myself. I don’t know where I am because I’m not I think this is gonna air Monday so I think I’m going to be in in Orlando but I can’t 100% promise that.

I was only off by roughly 35 days about when I would air that I appreciate all of you watching the Chit Chat money guys go check out their programming, they do a wonderful job. We will have them back on the program. Thank you for sticking around. We are near the end and JT street if you want to bring up our finisher, let’s take this thing home. Which segment are you most confident about over the next decade? About 21% of you said electric vehicles, about 47% of you said technology. A lot of you pointed out in the comments that all of these are technology in some fashion. But 28% said payments and about 3.6 said space. I actually think it’s payments. We are in the beginning of a massive disruption of the traditional banking system. Now if I said 20 years, I think it would have been space. When it comes to electric vehicles. I actually think it’s gonna take longer than people think.

We appreciate you sticking around we know it’s a Friday. If you’re listening to this as a podcast we appreciate that please gives us a thumb thumbs up a five star rating or whatever it is, wherever you happen to be getting 7Investing Now and of course, the seven investing podcast which airs on Tuesday and Thursday, that is more live long form interviews whereas this is more of a free flowing show. Responding to the news of the day. If you would like to get in touch with us that is info@7Investing.com. That has questions about your membership questions about how to find something on the site. Maybe you aren’t a member maybe you want to be a member or anything like that send it to info@7Investing.com. If you would like to interact with us we are at seven investing on Twitter and remember it’s the first of the month our new picks are out. If you join not only do you get those picks you also get all of our past picks ever. Use subscription code now sign up at 7Investing.com/Subscribe. For Maxx Chatsko, go for the Chit Chat money guys for Ryan and Brett, for JT Street, for Sam Bailey for everyone back at their various 7Investing homes. We will see you again on Monday. Thanks everybody.



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