As the world desperately weathers the COVID storm, Facebook and Spotify are taking gambles that could see them solidify their market-leader status’
There aren’t many similarities between Facebook (NASDAQ: FB) and Spotify (NASDAQ: SPOT), so this article may hit readers somewhat between the eyes. However, both companies did report their Q1 earnings on April 29, have seen their stock jump more than 20% since that time, and both announced game-changing news yesterday.
Facebook is going all-in on e-commerce, while Spotify has signed the ‘Joe Rogan Experience’ podcast exclusively as of 2021, in a deal worth a reported $100 million. Why are both of these moves so pivotal though?
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Why is Facebook expanding into e-commerce?
Facebook saw revenue jump 18% to $17.74 billion in Q1, as well as reporting just under 3 billion monthly active users — roughly 40% of the world’s population. However, the social network saw its ad revenue ‘slow significantly’; a trend felt across all social media platforms, including Twitter (NYSE: TWTR) and Pinterest (NASDAQ: PINS).
Although ad revenue still climbed, the pandemic-driven hit to growth highlighted Facebook’s kryptonite in that 99% of its income is generated by ad revenue. What happens if the pandemic persists? Or another virus comes along? Business 101 will tell you that it’s never a advised to put all your eggs in one basket. Just look at Apple (NASDAQ: AAPL). iPhone sales growth is no longer its be-all-end-all, as it has diversified into services, wearables and more. What can Facebook do? Join the ever-growing wave of e-commerce dominance, of course.
It makes sense for Facebook to spread its risk and e-commerce is enjoying a moment right now. Amazon (NASDAQ: AMZN), Shopify (NYSE: SHOP), MercadoLibre (NASDAQ: MELI) and the other main players are enjoying unprecedented demand as people are forced indoors due to coronavirus. ‘Facebook Shops’ will allow third-party sellers to create digital shopfronts on Facebook or Instagram, while users can browse products, message businesses to arrange purchases, and in some cases buy them directly via a recently introduced online checkout feature. Facebook will even collect a small fee to cover credit card processing costs and fraud monitoring. Should this move work out, Facebook has the means and user-base to become a giant in the arena.
Risks to this move?
Facebook doesn’t exactly have the best track record in diversifying its product offerings. Not only are there glaring issues of privacy surrounding the company, but antitrust regulators have placed a bullseye firmly on Mark Zuckerberg’s back ever since the 2018 Cambridge Analytica scandal.
Its hardware business has never taken off (did you even know they had a hardware business?) and its cryptocurrency venture ‘Libra’ has run into a host of problems. E-commerce may well prove a step too far for the company, as it is going up against long-established and trusted names in Amazon and eBay (NASDAQ: EBAY).
What about Spotify?
It’s easy to forget that Spotify has also been thriving during this pandemic, as when we talk about streaming, we tend to focus on the maelstrom of reports surrounding the likes of Netflix (NASDAQ: NFLX) or Disney+ (NYSE: DIS). Spotify’s recent earnings report was a godsend for investors, with the streaming giant pulling in just under $2 billion in revenue and beating expectations on earnings with a loss of -$0.20 on a diluted basis and breaking even undiluted.
Unlike Facebook — which dominates its sector — Spotify is in direct competition with titans such as Apple and Amazon. However, though Apple Music nudges out Spotify in U.S. subscribers, Spotify’s 130 million paid subscribers worldwide dwarfs Apple’s roughly 60-70 million subscribers (they haven’t given exact figures since June 2019) and Amazon’s 55 million.
Now, by signing one of the hottest podcasts on the planet in Joe Rogan, Spotify has laid down the gauntlet, especially considering Apple recently boasted of having the largest collection of podcasts in the world. The implication is that Spotify can now attract the biggest names in the ever-growing podcast industry, and unlike Apple, it is making them exclusive, and thus creating a barrier to exit for consumers. Spotify has made podcasts its core focus in recent years, acquiring Gimlet Media, Anchor, Parcast, and The Ringer in the past year.
The podcast industry is expected to grow to $1 billion in annual revenue by 2021, and Spotify seems to be ahead of the curve in monetizing it. Let’s not forget that this is a very young industry, and should Spotify continue to dominate its output, it may well become the Netflix of podcasts. If so, maybe they’ll pay us $100 million for our Stock Club podcast?
Should investors bet on Facebook and Spotify?
Both of these moves show that neither Facebook nor Spotify is backing down from the threat of recession or a pandemic. Though many companies are attempting to simply weather the storm, Facebook and Spotify are expanding, and taking advantage of the lack of movement from other businesses.
While Apple and Amazon have their other, more lucrative revenue streams to worry about, Spotify can take control of the growing podcast industry, and shore up its service as the dominant name in music streaming.
Facebook, on the other hand, has the much harder task of taking on Amazon at its own game. However, with almost 3 billion active users and gazillions of terabytes worth of data, Zucks and Co. might just stand a chance.
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