Spotify is spending hundreds of millions to become a major podcasting player — and Wall Street sees massive potential for the stock (SPOT)

Between new listening formats, better ad targeting tools, and exclusive content deals, Guggenheim sees a path for Spotify to monetize podcasts more effectively.
SunTrust Robinson Humphrey hosted an investor meeting with members of Spotify's management team this week and reached a similarly bullish conclusion.
The Sweden-based music streaming app has already purchased three podcasting companies in 2019 including Gimlet Media, Anchor, and Parcast.
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Spotify's big bet on podcasting could pay off, and handsomely.

So says a research team at Guggenheim Partners led by Michael Morris. Spotify's podcast initiatives over the last few months have led the analysts to elevate their outlook for the music-streaming service's advertising revenue.

After shelling out hundreds of millions of dollars on podcasting companies this year alone, Spotify has begun to make product changes to integrate podcasting into its service.

Guggenheim's analysis points to Spotify's exclusive content agreements such as the company's deal with former President Barack Obama, and new formats like the "Your Daily Drive" playlist which mixes news podcasts with music, as major enhancements to its podcast offering.

Last week, Spotify also rolled out a feature to allow advertisers to target people based on which types of podcasts they're listening to.

Guggenheim notes that Spotify was the ninth-most-downloaded app during the second quarter of 2019. That marked its highest quarterly ranking in more than two years, according to data compiled by AppAnnie.

"Sequential improvement in app downloads indicates new and returning user growth, a positive trend and supportive of a bullish view that the company's global addressable market is well in excess of current streaming music subscriber levels." Morris said in the research note published on Tuesday.

Guggenheim Securities - ad revenue Guggenheim Securities

Podcast advertising revenue increased by 54% last year to $479 million, and could grow to as much as $1 billion by 2021, according to the report. If Spotify can capture 25% of that market, which is in-line with current estimates, it would generate an additional $250 million in annual revenue, the firm estimated.

Guggenheim is hardly the only Wall Street firm to look fondly upon Spotify's podcasting efforts. SunTrust Robinson Humphrey hosted an investor meeting with members of Spotify's management team on Tuesday and said the company predicts exclusive content deals will strengthen user engagement and monetization for its podcast business.

"The company sees it as a content arms race and not many others are racing alongside SPOT," Matthew Thornton, an analyst at SunTrust Robinson Humphrey said in a research note published on Tuesday.

In February, Spotify announced its intentions to spend somewhere between $400 million and $500 million on acquisitions in the podcast space in 2019. The company purchased Gimlet Media, a podcast creation studio, for about $230 million, and Anchor, which provides tools create and distribute podcasts, for an undisclosed amount.

"This is a very, very early market that we're seeing. And our view obviously is that while are starting to flock to listen to podcasts, there's still tremendous growth both in the US and internationally on the demand side," Daniel Ek, the chief executive officer and chairmen of Spotify said in the company's earnings call for the first quarter of 2019.

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