Kori Hale: Hello, everyone, and good afternoon and welcome to Public Live this Thursday, March 9th. I am your host, Kori Hale and today folks, we're going to be discussing Spotify’s recent Stream On event and be updating you on Metas year of efficiency as well as other big tech news. And I'm excited because this is one of my favorite guests we have on the show with us today. It's Mark Mahaney, senior managing director and head of the internet research team over at Evercore ISI. Mark is also if that wasn't enough, and it is but he is also the author of a new book titled Nothing But Net 10 times stock picking lessons for one of Wall Street's top tech analysts. And of course, right here on Public, we're doing book giveaway. So if you want to get your hands on a copy, just send a DM to the public alive handle. Alright, Mark, welcome back to public life.
Mark Mahaney: It's good to be back, Kori.
Kori Hale: We're always happy to have you join us. And of course, you break down as some of these big tech names on Wall Street, as I mentioned, and we got to talk about Spotify. The streaming platform recently hosted its Stream On event and announced many new features planned for the app. For those of us who maybe did not catch that announcement, could you provide some insight into some of the standout features that were discussed?
Mark Mahaney: Okay, I think this was their fifth annual Stream On event. It's kind of their product. It's like their customer event, but it's really kind of a product development event. I guess that's what it is. It's it's like, it's like Apple's worldwide developer conference. Now not nearly as impactful or meaningful as that, but it's just this is where they roll out their latest innovations. So there was some new disclosure to the founder, Daniel Eck, the CEO announced that they are now over half a billion monthly visitors, which means that monthly average users, which means that they're now a little bit ahead of their guidance for the March quarter, it's a small thing for the financial folks out there. Second is they disclose that Spotify recommendations are powering more than half of users streams. And why that matters is you know, the more that Spotify is music, people who listen to Spotify, listen to curated music, rather than just going on there and saying, you know, I want this song by Taylor Swift, the extent to which they kind of give the wheel, give the mic, give the turntable that's the right one, Kori, give the turntable to Spotify and say, play me something interesting. That means that Spotify becomes more influential, and that means that artists then want to pay to kind of influence To that influence, or that they're willing to advertise, you know that that creates more of an opportunity for them, you know, the, the retailer who simply just fulfills, doesn't generate margins as nice as the retailer who actually suggests and can and can influence tastes and patterns and things like that. And then the last thing that I thought was interesting is they have a new home feed that's coming out. And I think it's a little bit what I would call the TikTok isation of Spotify. So you're gonna see more TikTok-like features short-form video kind of right up front, you can see sort of a little bit of endless feed is the wrong word, but you're gonna see some of that you're gonna see more than just the static feed when you start. So these are all going to all these little nuances that sort of improve, they also talked about an AI DJ, I'm not sure we're going to really notice a difference, but we'll try it out. And then a new ad format, that's kind of a small video ad format, anything that generates ad revenue for Spotify is going to be good for their gross margins. So those are the features that came out of Spotify’s Stream On on event yesterday,
Kori Hale: Mark, I love that you brought up actually a plethora things that I want to really quickly piggyback off of. And also, we probably have lots of Swifties in our audience, and they probably were like, Mark, we only play Taylor Swift straight through. We don't need any sort of DJ for that. But the interesting thing about what I are what came to my mind was Payola back in the day, which I might be dating myself back in the radio days, when radio was a massive thing, right in artists, more so record labels are paying radio DJs right to play their particular artists. Are you saying then since there's more of this suggesting type of thing that's going to happen with Spotify going forward that there could be some streaming Payola-ish version at some point?
Mark Mahaney: Well, you're using a very loaded word and Payola and you know, in some senses, that's what it is. But in some senses, maybe we need to rethink it a little bit. So when you use Google search engine, do you think about all those paid ads within Google as Payola? In other words, you know, when when you do a search for, you know, tickets to March Madness games, basketball games, or when you do a search for, you know, Hawaiian, you know, budget, airfare, and you get these paid results in there. I mean, that's essentially I've thought about this as Google's I'm sorry, as Spotify, Googling it search results, you go on there, and you look at today's top country hits, or today's you know, whatever hit it, and hip hop, I think they've got it, they've got something, you know, for a Christian country, I mean, they've got every possible genre you can imagine in there. And if you're an emerging artist, and if you're in a label, you know, this is like, this is a target-rich environment. I mean, these are people listening to your genre, you're a new artist, you know, like to you to here's an opportunity for you to advertise your song so that Italy shows up somewhere in the queue. Now, many people may not listen to your music, but at least here's a chance to market or advertise. And so that's kind of how we think about it. And so I don't know if that answers your question. But that's what that's the exact intent behind Spotify. And what they've done is given labels the ability to market to advertise their newest labels, their newest features, their newest artists, one of the world's largest, most influential music platforms, if you can make it on Spotify, you can make it anywhere. Spotify makes or breaks artists. And then sorry, but that is true, given how they've got half a billion people who listen to the surface, and probably 250 million who listen to it on a daily basis. There's no music listening service outside of YouTube, that's any bigger any more influential than that. And so that's how I think about and I've always thought about it as a great opportunity last year, I think they generate about $200 million in revenue a little bit more than that, from this what is what I call this advertising revenue. I think it's good for Spotify’s business model. And I also do think it creates opportunities for us of the artists that are on Spotify, here's a chance for them to here's a chance for them to promote their work their blood, sweat and toil.
Kori Hale: Well, you know what, Mark that makes me think what else do you think is good for Spotify his business model because right now you're holding a price target of $185 on their stock with an outperform rating. What is it beyond that? The fact that they're getting this half a billion monthly active users that really, you know, has you all over at Evercore ISI so pro Spotify?
Mark Mahaney: Yeah, I am pro Spotify. I was pro-Spotify last year Kori I think you remember that. And the stock tanked. I thought we were going to have an inflection point last year we didn't. And I thought I meant that in terms of gross margins. This is why I like Spotify here and I may be wrong again. You know, but I'm trying to get it right this time. So one, we know that the multiple has come down dramatically on this one This thing goat used to go at four or five, six times, he'd be, you know, enterprise value to sales. Now we're sub two times like that's cheaper than Netflix is cheaper than, well, sort of online dating companies which are somewhat similar. I mean, this is a subscription business and an advertising business, although it's mostly a subscription business. So I think it's cheap. I think the estimates have been de-risk. I think the multiple has then been de-risked. They've started taking some cost actions, they probably overbuilt like a lot of tech companies. So they've been taking some cost actions. But why I particularly like the setup this year, is that I think you're finally at a place where you're going to cut back on some of that podcast investment, heavy spending that they've had. So I think you're finally going to get gross margins to move up. For low gross margin businesses. When you see gross margins move up, it's almost always a major catalyst for the stock. Second is they are likely to implement a price increase their biggest competitors, Apple and Amazon have both implemented a price increase. So it gives it kind of raises the umbrella a little bit and allows them to raise prices. Usually, that's a good thing for companies and for and for stocks. And then the third thing is Kori, last year, they had a record number of new users globally they added the number was something like 70 million. And what typically happens with Spotify is people come on as free users. And then over time, they kind of migrate a decent number of migrate over to be paid subscribers. So if the pick of the record MAU growth last year converts into paid subscriber growth, boom, I got my third catalyst for this year. So that's why I like it. I think the thing can recover to sort of like two times EV to sales. I just don't think that's an aggressive multiple. I know we're in a tough market for for growth equities. This year. This is a company that's been consistently free cash flow positive, admittedly a very small, minimal level, but I do like it and I think it's it's the leading way to play music streaming worldwide. So that's why we that's why we're pitching Spotify is one of our top longs this year.
Kori Hale: See Mark just because you were wrong last year, that doesn't mean you're wrong. This year. We're not even before three months into the year and Spotify obviously doing pretty well. However, competition this year for Spotify, right also completely ticking up. This is no pun intended specifically with TikTok, right. This is a major competitive threat. Spotify has, you know, acknowledged this, you know, as part of their business model the company is working to obviously expand its streaming globally. TikTok has already said that, do you actually see Tik Tok as a threat to Spotify? Especially with maybe the legal issues by legal I mean regulatory issues around TikTok in the US.
Mark Mahaney: Kori I may be wrong, but I don't think so. I think the bigger competitive risk really is Apple Music. YouTube music, Amazon music. Those are kind of the more direct So, let's see. Yeah, I think I'm not sure the competition is greater. But yes, TikTok has got a, you know, huge audience worldwide. It's one of those things where can the brand really be stretched? Are people going to really think about like, TikTok is a wonderful experience for you know, for consumers. It's just highly entertaining, addictive, maybe, but also truly highly entertaining. But it's a different type of entertainment than music. And I'm in one of the problems that TikTok is apparently having is getting the rights that Spotify spent a lot of time getting from the labels. So I just, I'm not at all sure that TikTok is going to come out and directly compete with, with Spotify. I'll take the other side on that I may be wrong. I worry about the other companies. But I've just noticed in the seven years I've been running surveys on Spotify, every year, they seem to gain more share of ear can I say that, share of ear you know, like their their share of people listening to streaming music on Android devices. And by the way on Apple devices has pretty consistently risen over the last couple of years. So they're doing something right the real issue on the stock and why it hasn't done anything since its IPO is or direct listing is the business model and people want to see the gross margins go up people want to see them start generating substantial amounts of free cash flow they generate minimal amount but let's get chunky. Let's get a lot of free cash flow. I think they can start gapping up that gross margin this year start growing it I think 10 People can start believing again that there can be sizable free cash flow and that could cause the rewriting in the stock to go up this year. That's why I like it.
Kori Hale: All right. No, I I'm with you on that Mark. I want to shift really quickly while we have some time though and cover another big tech company which is Facebook's parent company Meta they're entering into their year of efficiency are since entering I guess it's continuing as the social media giant is expected to layoff thousands more or employees as early as this week. Might I also add it is not lost on me that a company that's shifting into a year of efficiency, which is away from the metaverse after they changed the parent company name to Meta is a lot of questions in my mind around that. However, this is the second largest scale cut these layoffs by Meta. How many more can investors expect as part of this year of efficiency?
Mark Mahaney: Well, I do think it's necessary the year of efficiency. You know, we there's two factors that are going on here. One is that overall demand trends are softening for macro economic reasons. And so layoffs aren't fun. I've gone through them, you know that they're painful for everybody involved, especially if you're one of those people getting laid off. But you know, when times get tough, we all the households tighten their belts and companies need to tighten their belts. And one way you do that, is you unfortunately have to let go some of your employees. The other thing, though, that's one factor. But the other one that Jim maybe just as material and maybe more so is that there clearly are some companies that overbuilt post the COVID crisis, I think Amazon was one I think, Meta was one if you were to go back and look at the revenue growth between 2019 and 2022. And then the OPEX growth, your operating expense growth, you'll see there's a couple of companies that really stick out that they grew their expenses more than their revenue, even though revenue shot up materially between 2019 and 2022, the expenses grew even more. And I think these companies sort of assumed that there was this positive inflection and demand for the services that we kind of continue on for many, many years. That didn't happen. It's not like we've gained, it's not like we've reverted to 2019. It's just that the growth rates have kind of more normalized, rather than just kind of kept it accelerating level. Anyway, all of that is Meta was one of those companies, demand trends are softening for online advertising, no question about it as they are for all marketing spend, and this company over hired, and it's probably the right thing for them to do to take these layoffs. I you know, I think what's been reported recently, I think that is probably going to happen. There's enough there's enough smoke there. There's got to be some hiring fire. I think that's good. I think that actually was a surprisingly good pun. And then I'm going to use that in the note thank you, Kori. And then, but yeah, so I think that's happened. And I think it helps, what investors want to see is defend the bottom line, you know, you can't control what's going to happen to you know, ad marketers, and how much they're going to spend in a recession, you can control your cost basis, and show me that you're going to do that show me your grown-up company. And Zuckerberg kind of weaved and waved a little bit last year. But I think he got to the I think he finally I think most of the signals he gave were it Yes, I'm a mature company, CEO. I'm a CEO, I'm a mature CEO of a company, it may be a mature company. And we need to be much more careful about expenses. And it's not growth at all costs. And when he started to do that, I think he's been rewarded by the market. And I think there's more of that coming. And I also think that the revenue growth trends are going to improve at Facebook because I think they're improving their ad tracking their ad attribution models. And I think they're going to be able to better monetize reels, which I think has turned out to be phenomenally successful for both Instagram and Facebook in terms of new users and more engagement. So I really like Meta here. I think it's still cheap at 14 times earnings. And I think there's 50% upside in the stock. So it's actually my number one pick right now.
Kori Hale: Wow, number one pick. I didn't know that's where you were going with that mark. But that's that's a strong conviction there. Okay. Number one pick, you know what I was thinking to in the broader tech scheme, something I'd love to get your insights on. We don't have time to do it today. So we'll have to have another session. But I really want to pick your brain around chat GPT around Microsoft's login strategy, how you see that playing into revenue. What does that do to Google? Especially because you brought up ads of the like and how that all could really up in certain business revenue lines across different tech companies. I don't know if you've given that any thought but I'd love to hear what you have to say on that next time around. Next time around. All right, everyone. This was a great session. By the way I love this and I we always love when Mark comes on and shares his insights. Once again, everyone this is Mark Mahaney, senior managing director and head of the interset internet research team over at Evercore ISI don't forget about the book giveaway that we're doing DM us and Public Live handle today. You can get Mark’s latest book, which is nothing but net can timeless stock-picking lessons from one of Wall Street's top tech analysts. Thanks so much for joining us, Mark.
Mark Mahaney: Great talking with you, Kori.
Kori Hale: All right, guys, and that's going to do it for today's afternoon session. Of course, we'll be back with more sessions throughout the month but until then, enjoy the rest of your day.