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Popular audio-streaming platform Spotify (NYSE: SPOT ) didn't have a great 2018. Although Spotify stock soared soon after its initial public offering, shares suffered from both fundamental questions and bad timing. In the aftermath of last October's broader market correction, SPOT eventually closed out 2018 down 14%.
This year, SPOT stock is enjoying much better fortune. On a year-to-date basis, shares are up around 21%. But on the fundamental end, questions are piling up. Spotify didn't endear themselves to Wall Street, badly missing its earnings target for the first quarter of 2019. Adding to the uncertainty, management recently announced they're bringing voice-controlled advertisements to the streaming platform for a limited user base.
Although increased interaction with smart devices represent the future, the concept of voice-controlled ads bring up dystopian imagery for me. Apparently, I'm not the only one. Gizmodo contributor Catie Keck blasted the move as an "engagement hellscape." That's hardly a ringing endorsement for the new marketing direction or indirectly for Spotify stock.
But I certainly understand Keck's reservations. Here's how this next-generation ad works: Spotify will initially target some users who have their microphone enabled. The streaming app will then feature an ad that requests the listener to speak a keyword. If the listener utters the magic phrase, the ad will presumably provide a detailed sales pitch. If not, the ad just plays out, and the music returns.
Now, that doesn't sound too terrible. Some folks might say that this is a convenience, and therefore, a net benefit to SPOT stock. However, Keck looks out to future: what if advertisers inundate streaming channels with annoying phrase-requested ads, pestering you until you give in?
Ticking off the user base is a no-no for Spotify stock.
Why Voice-Controlled Ads Could Lift Spotify Stock
I share Keck's reservations. At the same time, every story has two sides. Keck speaks from the (free) end-user's perspective, who come to the table with many demands. On the other end sits the business angle. Here, the line is, beggars can't be choosers .
Let's get down to the numbers. Recently, SPOT hit a major milestone , garnering more than 100 million paid users. Most notably, the music-streaming firm beat out rival Apple (NASDAQ: AAPL ), which only has 50 million paid users. This fact alone makes Spotify stock a compelling look.
However, the flipside is that the company projects 107 million to 110 million paid users against a total listening base between 222 million to 228 million users. Thus, a little over half are using Spotify's free service, which isn't a bad conversion rate. Unfortunately, the company still sheds money.
In order to convince prospective buyers to remain interested in SPOT stock, management must try new conversion tactics. If that involves annoying listeners until they open their wallet, so be it. When you look at the rising number of paying subs, it's obvious that the music-listening audience have few viable alternatives.
Sure, the growth rate in paid users has consecutively declined since Q1 2017. Bulls will counter, though, that this is merely the law of large numbers shifting its weight. And when you look at the metric objectively, the growth rate is still robust. Since Q1 2018, paid-user growth on a year-over-year basis averages just under 39%. From Q1 2016, the rate is 54%.
In other words, Spotify is expanding one of its most critical components even after the "newness" factor has faded. But since the company is still not generating a profit, it must take its ventures to the next level. Voice-controlled ads could do the trick for Spotify stock.
SPOT Stock Is Merely Adapting to Tech Trends
No one likes commercials, even if they fund our "free" entertainment. Logically, then, no one wants these necessary evils to become more intrusive.
Keck is right in that advertisers will game the system to somehow force watchers and listeners to pay attention, and later, to pay up. However, complaining about the ad industry's brave new world is ultimately a waste of time.
Everywhere you turn, the digitalization sector is telegraphing voice-controlled ads. We live in a world where devices from Amazon (NASDAQ: AMZN ) and Alphabet (NASDAQ: GOOG , NASDAQ: GOOGL ) act as our personal assistants. We speak to them , giving them orders and asking for information. Although the tech is not yet perfect, it's getting there.
Therefore, it's inevitable that content marketed to us will come in the form of requested vocal engagement. Many folks may find this development disturbing. But don't blame Spotify stock: the underlying company is merely a product of its time.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
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