This week I’ve been looking at a few small cap shares that have been tipped for big futures.

Continuing with that theme, here are two more to watch in 2021:

CleanSpace Holdings Limited (ASX: CSX)

CleanSpace is a designer, manufacturer, and seller of workplace respiratory protection equipment (RPE) for healthcare and industrial end markets. It shares have been strong performers since listing on the Australian share market through an IPO that raised a total of $131.4 million. Though, it is worth noting that only $20 million of this was primary capital. The remainder is for long term shareholders to realise some of their investments.

It will be using the proceeds from its IPO to support its growth plans. These include growing its current position and markets while positioning for a broad range of additional growth opportunities. Management is also aiming to build on the adoption of CleanSpace products in the healthcare and industrial markets, expand awareness, enter new international markets, and continue to expand and advance its product portfolio.

Pointerra Ltd (ASX: 3DP)

Another small cap ASX share to watch in 2021 is Pointerra. It is a growing technology company with a focus on the commercialisation of 3D geospatial data. The company’s software solution allows users to manage, visualise, and share extremely large digital 3D datasets. It can also extract vital information from the data quickly that would otherwise take many hours to do.

Pointerra has been growing strongly this year despite the pandemic. For example, the company recently revealed that demand was increasing and underpinned solid growth in its Annual Contract Value (ACV) in November. The company reported an 18% increase in ACV to US$5.82 million between October and November.

The good news is that this is still only a tiny portion of its overall market opportunity. Management estimates that its global market opportunity is currently worth a mouth-watering $500 billion annually.

More reading

• 5 exciting small cap ASX shares to watch in 2021
• Why the CleanSpace (ASX:CSX) share price is climbing today
• 2 exciting small cap ASX shares growing rapidly
• ASX small caps could get a boost with the Aussie dollar hitting 28-month highs
• Here are the best performing ASX tech shares in November

James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Pointerra Limited. The Motley Fool Australia has recommended CleanSpace Holdings Limited and Pointerra Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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The Electro Optic Systems Holding Ltd (ASX: EOS) share price has been a weak performer in 2020. After a strong start to the year, the company was marred by severe disruptions to its operations.

Let’s take a closer look at what’s been impacting the Electro Optic share price in 2020.

Electro Optic Systems 2020 overview

At the beginning of the year, the Electro Optic Systems share price took off to reach an all-time high of $10.80 in February. The business first made tailwinds by acquiring Audacy Corporation, a space communications company based in the United States. EOS advised the takeover would represent a new step towards the company entering the space communications market.

Roughly a month later, Electro Optic Systems reported a sound result on its 2019 full-year scorecard. Group revenue increased to $166 million, up 91% over the prior corresponding period (pcp). Earnings before interest and tax (EBIT) rose to $21.7 million, a 194% jump over the same time last year.

The pandemic hits

All seemed rosy until COVID-19 took the world by surprise in March. The sweeping pandemic threw logistical challenges to Electro Optic Systems as countries closed their borders for an unforeseen period of time. This, in turn, hit EOS’ multiple revenue streams as contracts were put on hold and equipment ready for delivery was unable to transit.

In response to the deepening situation, and the hole it was leaving in EOS’ pocket, the company initiated a capital raise. A $134 million placement was completed in April through institutional investors at an offer price of $4.75. The successful placement was undertaken to enhance liquidity and continue funding ongoing growth initiatives, as well as working capital requirements.

As the new financial year was about to dawn, the Australian Government announced a $270 billion defence spending package for the next 10 years. The initial purchase of 251 remote weapon stations for $100 million sent investors into a frenzy, causing the Electro Optic Systems share price to surge as high as $7.30 .

In late August, EOS reported its half-year results for the 2020 financial year. Revenue lifted to $75 million, 31% above the pcp, however the company saw an EBIT loss of $18.2 million, reflecting a 288% drop. The disappointing performance sent the EOS share price back down to around the $5 mark.

However, in September, the company announced a raft of positive updates. These included the release of a new counter drone product, the resumption of a major overseas delivery, and the completion of the Australian Government contract negotiations. The EOS share price started to gain traction again, rising to as high as $5.94 at the end of the month.

Most recently, Electro Optic Systems withdrew its profit guidance because of the short-term impacts of COVID-19. The original forecast of EBIT guidance of $20 million to $30 million is expected to flow into the next calendar year. Management said the company is experiencing a delay of around 12 days in shipments to foreign governments.

What’s next for the company?

While COVID-19 vaccines are being deployed to the public in an effort to halt the spread of the virus, Electro Optic Systems is patiently awaiting a return to ‘normal’ trading conditions. Closed international borders have affected supply chain logistics and resulted in EOS still having orders awaiting delivery.

On a positive note, broker Citi initiated a target price for Electro Optic Systems shares of $7.80 over the next 12 months. This represents a 30% gain on the current price of $5.98 (at the time of writing).

More reading

• Here’s why the Electro Optic (ASX:EOS) share price is down 7% today
• Electro Optic Systems (ASX:EOS) share price climbs on government contract win

Aaron Teboneras owns shares of Electro Optic Systems Holdings Limited. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Electro Optic Systems Holdings Limited. The Motley Fool Australia has recommended Electro Optic Systems Holdings Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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The IGO Ltd (ASX: IGO) share price has been on a tear this month following the mining company’s $766 million capital raise to acquire a stake in Tianqi Lithium Energy Australia Pty Ltd.

Shares in IGO have rallied 31.2% since the beginning of December on the news, compared to a 0.09% increase in the S&P/ASX 200 Index (ASX: XJO)

The nickel miner has optimism swirling around it with its plans to create a ‘unique clean energy metals company’.

Give me the details

On 9 December IGO announced to the market its intentions to acquire a 49% stake in Tianqi Lithium Energy Australia Pty Ltd. The deal would provide IGO with a 24.99% indirect interest in the Greenbushes Lithium Mining and Process Operation and a 49% indirect interest in the Kwinana Lithium Hydroxide Plant.

The total transaction value of the deal being considered is $1.9 billion. $1,100 million of this will be funded through new debt facilities; $766 million from their latest equity raise; and the remaining $85 to $149 million from existing cash reserves.

This deal is strategically focused to put IGO on the map when it comes to supplying metals that are required in the clean energy future.

IGO expects the transaction to be earnings per share accretive from FY23. Subject to shareholder approval the completion of the deal is expected to be in the June 2021 quarter.

Broker upgrades

Broker, Jarden, is particularly pleased with the acquisition and has upgraded IGO to “outperform” from “neutral” – calling it a “game changer” for the company.

The deal comes at an opportune time, addressing the concerns of the short mine life of IGO’s flagship Nova nickel mine – which is estimated to only have roughly 6 years left in it.

Jarden points out that they believe IGO managed to get an exceptionally attractive price for their stake in these high-quality assets.

Next steps from here

IGO will need to get shareholder approval in early February 2021, which shouldn’t be an issue given the optimism. From there it is a process of completing the Tianqi restructure and signing off on the transaction completion in the June quarter of 2021.

We will have to keep a watch to see how well IGO leverages these new assets, and what cost synergies may form.

IGO Ltd’s market capitalisation is $4.65 billion at the time of writing.

More reading

• ASX 200 Weekly Wrap: ASX 200 hits a 6! Thank iron ore
• These were the best performing ASX 200 shares last week
• UBS just downgraded these outperforming ASX mining stocks
• ASX 200 down 0.3%: CSL sinks, Zip’s Facebook deal, IGO rockets
• Why Eagers Automotive, IGO, Marley Spoon, & Zip shares are charging higher

Motley Fool contributor Mitchell Lawler has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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Silver Lake Resources Limited (ASX: SLR) shares are not having a great day today. At the time of writing, the Silver Lake share price is down 1.12 % to $1.77.

Mind you, the S&P/ASX 200 Index (ASX: XJO) is not having a great day either. But the ASX’s flagship index is currently down 0.77%, so Silver Lake shares are still underperforming today. And that’s probably not what Silver Lake investors would like to see right now.

The Silver Lake share price is still healthily in the green for 2020 thus far (up 28.36% year to date). It’s also up almost 64% since 16 March. But Silver Lake shares are still down more than 35% from the 52-week high we saw back in July. They are also down more than 10% since 21 December alone.

So what’s the latest from this mid-tier ASX gold miner?

Well, the company has released a number of significant announcements to the market over the past two weeks or so.

Firstly, on 23 December it told investors that, as of 18 December, the VanEck Vectors Gold Miners ETF (ASX: GDX) has increased its holding in Silver Lake. This represented a move from 84.98 million shares to 94.52 million shares. The latter represents 10.72% of Silver Lake voting power.

Silver Lake’s latest sale

Secondly, Silver Lake told investors on 23 December it has decided to divest its Andy Well and Gnaweeda projects in Western Australia to Latitude Consolidated Ltd (ASX: LCD) for approximately $8 million. This transaction is “expected to close in early 2021”. According to the company, it “realises immediate value for two non-core projects for Silver Lake shareholders, whilst providing the best opportunity for the Andy Well and Gnaweeda project to realise their potential within a focused exploration company”.

These two projects reportedly cover 343sq kms. The projects are estimated to contain approximately 776,000 ounces of gold (measured and indicated reserves). The release notes that these two fields were placed on “care and maintenance” in September 2017. This was due to low gold prices and capital requirements of the mines’ then-owner Doray Minerals Limited.

Silver Lake notes that the mines’ existing reserves have returned samples indicating a gold ore concentration ranging from 9.4 grams per tonne to 64.9 grams per tonne.

Latitude’s management was pleased with the acquisition. It noted that:

This is a tremendous development for Latitude and after diligently reviewing several project opportunities over recent months, we are pleased to report the acquisition of the Andy Well and Gnaweeda Gold Projects in WA. The Board’s intention has been to identify a strategic acquisition opportunity that provides our shareholders with exposure to a compelling geological story, with a clear pathway to generate growth through brownfields exploration, and we believe Andy Well and Gnaweeda tick both of these boxes comfortably.

More reading

• These were the worst performing ASX 200 shares in November

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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Shoes retailer Accent Group Ltd (ASX: AX1) seems to have defied the odds in 2020. While other brick and mortar discretionary retailers have struggled in the face of government-imposed lockdowns this year, the company’s revenues have instead grown steadily.

In the process, the Accent share price has also risen by 27% during the year.

Let’s take a look at how the company has been able to achieve this feat.

Strong financial results

For the FY20 full year, Accent reported an earnings before interest, tax, depreciation, and amortisation (EBITDA) of $121.6 million. This was an increase of almost 12% compared to the previous year.

The company then followed this up with a strong first 5 months of FY21, saying that its sales were ahead of expectations.

More importantly, Accent reported that its digital sales were up by 129% on prior year.

This pivot to digital platform seems to have been the company’s savings grace during the pandemic lockdown when some of its retail stores had to be closed temporarily.

Investment in digital platform

In June, at the height of the lockdown, Accent’s online sales surged more than 150%, and accounted for 23% of all sales.

At the time, the company said that its strong digital sales have been well ahead of expectations, with 18 websites performing and capitalising on the the online trend.

The pivot to online has not been done overnight. The company has in fact been building its digital infrastructure over the last three years.

In the company’s annual general meeting (AGM) in November, Accent said it delivered across all digital metrics.

It said that the conversion rates on its website platforms remain strong, up 36% on prior year, and driven by improved marketing and website capability.

It also reported that the average order value growth across all its websites has accelerated.

The company said it was targeting 30% sales to come from its digital platforms overtime, with the objective to grow its online customer base to 10 million.

Accent also said it was investing heavily on its digital platforms to improve the online experience for customers. This, the company hopes, will drive incremental sales through increased conversion rates, average order value and repeat customers.

More about the Accent Group

Accent is a footwear retailer that holds the license for some hugely popular shoe brands such as Dr Martens, Saucony, Skechers, Timberland, and Vans among others. It also owns the Athlete’s Foot, Platypus and Hype DC retail outlets.

Despite the pandemic, Accent is on track to open approximately 80 new stores in FY2021. This includes new concept stores, such as Stylerunner.

About the Accent share price

As mentioned, the Accent share price has risen by almost 27%. This is despite the share price plummeting by 60% in March at the height of the pandemic. 

At the time of writing, the Accent share price is currently trading 2.61% higher for the session at $2.36. At the current share price, the company commands a market cap of $1.25 billion.

More reading

• Why Afterpay (ASX:APT) and these ASX shares just hit 52-week highs or better
• These are the 7 best ASX retail shares in 2020
• 2 ASX dividend shares with attractive yields
• ASX retail shares gear up for Christmas boom
• Forget term deposits and buy these ASX dividend shares

Motley Fool contributor Eddy Sunarto has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Accent Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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Making a passive income from cheap dividend stocks could be a neat solution to a challenging problem currently facing many investors.

The income returns on other mainstream assets, such as cash and bonds, are relatively low. By contrast, many dividend shares offer high yields, as well as long track records of reliable shareholder payouts.

Furthermore, the high yields on offer from dividend stocks suggest that they are cheap. This may mean they provide scope for capital growth in the coming years.

Making a passive income from cheap dividend stocks

Cheap dividend stocks provide a simple means of obtaining a relatively high passive income in 2021 and in the coming years. The 2020 stock market crash has left investors feeling downbeat towards a number of sectors. As a result, companies in industries such as financial services, defence and oil and gas currently have yields that are significantly higher than their historic averages. This could mean that an investor is able to enjoy a high income return simply from owning a diverse range of shares.

Of course, some companies with high dividend yields may face uncertain financial outlooks in the short run. This may mean that their dividends fail to grow at a rapid pace. However, those companies that have very affordable shareholder payouts alongside their high yields may offer attractive risk/reward opportunities. Investors may have factored in the risks they face through cheaper share prices, while their high dividend yields may be sufficient reward for higher risks.

A reliable track record of dividend growth

Cheap dividend stocks could also offer a worthwhile passive income because of their solid track records of shareholder payouts. As mentioned, some sectors are facing difficult near-term outlooks. However, some of the companies operating within them have good form when it comes to maintaining dividend payouts amid uncertain operating environments. In some cases, they may even have been able to raise dividends in the past despite tough sales and profit prospects.

Such companies may, therefore, offer a more resilient income outlook than investors are currently pricing in. The end result could be that they are undervalued at today’s price levels. This may mean that they are able to offer a high, and dependable, passive income stream in the coming years.

Cheap dividend stocks offer capital growth

Cheap dividend stocks may offer much more than just a passive income over the long run. Their high yields may mean that they offer wide margins of safety that equate to scope for capital growth in future. Therefore, a strategy that seeks to buy and hold them over the long run could deliver attractive total returns that are significantly ahead of other mainstream assets. The end result could be a positive impact on investor portfolios in 2021 and in the coming years.

More reading

• Why did the Accent (ASX:AX1) share price defy the odds in 2020?
• The ASX tech shares to buy in 2021
• Leading brokers name 3 ASX shares to sell today
• Why these 3 ASX shares smashed it in 2020
• 2020 wrapped: Is Spotify stock a buy?

Motley Fool contributor Peter Stephens has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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Are you interested in gaining exposure to the tech sector in 2021? While there are a good number of quality options to choose from, two of the best could be listed below.

Here’s what you need to know about these tech shares:

Altium Limited (ASX: ALU)

The first ASX tech share to look at is Altium. It is an award-winning printed circuit board (PCB) design software provider. Over the last few years, Altium has earned itself a leading position in a growing electronic design market. But management certainly isn’t resting on its laurels and is now aiming to dominate this market with its cloud-based Altium 365 product.

At the end of FY 2020, Altium had a total 51,006 subscriptions and was generating revenue of US$189.1 million. Looking ahead, management appears confident this strong demand will continue and is aiming to double its subscriptions to 100,000 and grow its revenue by 164% to US$500 million by FY 2025/26.

Credit Suisse is positive on the company and recently initiated coverage on Altium with an outperform rating and $42.00 price target.

Pushpay Holdings Group Ltd (ASX: PPH)

Pushpay is a donor management and community engagement provider to the church market. It has been an impressive performer during 2020, thanks partly to favourable tailwinds from the COVID-19 pandemic.

These tailwinds underpinned a very strong result in FY 2020 and an even stronger result during the first half of FY 2021. Pushpay’s half year results revealed a 53% increase in operating revenue to US$85.6 million and an even more impressive 177% jump in EBITDAF to US$26.7 million.

The good news is that management appears confident this growth can continue and has set itself bold long term targets. This includes winning a 50% share of the U.S. medium to large church market, which is estimated to be worth US$1 billion a year.

One of the keys to achieving this will be the recent launch of ChurchStaq. It is the combination of its Pushpay and Church Community Builder software. It brings together digital giving, donor development, church apps, and ChMS to deliver a fully integrated engagement platform.

Goldman Sachs is a big fan of Pushpay. The broker has a conviction buy rating and $2.59 price target on its shares.

More reading

• ASX 200 down 0.8%: Big four banks and tech shares drag the market lower
• Leading brokers name 3 ASX shares to buy today
• 3 of the best ASX shares to buy in January
• 2 rapidly growing ASX tech shares to buy
• 2 ASX 200 shares to buy in January

James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Altium. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of PUSHPAY FPO NZX. The Motley Fool Australia has recommended PUSHPAY FPO NZX. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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With most brokers taking a well-earned break over the holiday period, research notes are few and far between right now.

In light of this, I thought I would take a look at a few that have been released over the last few weeks that remain very relevant today.

Three sell ratings that you might want to pay attention to are listed below:

Commonwealth Bank of Australia (ASX: CBA)

According to a note out of Morgan Stanley, its analysts have retained their underweight rating and $68.50 price target on this banking giant’s shares. The broker notes that Commonwealth Bank has been given Chinese regulatory approval to sell its stake in BoCommLife to MS&AD Insurance Group. Although it acknowledges that this sale will give its CET1 ratio a boost, it doesn’t expect it to support a share buyback anytime soon. In light of this and its current valuation, the broker is holding firm with its underweight rating. The CBA share price is trading at $83.22 on Wednesday.

Estia Health Ltd (ASX: EHE)

Another note out of Morgan Stanley reveals that its analysts have downgraded this aged care operator’s shares to an underweight rating and cut the price target on them to $1.50. According to the note, the broker made the move after reducing its earnings estimates for Estia Health. Its analysts believe that the company’s earnings will be under pressure until the Royal Commission into the aged care sector is finalised. The Estia Health share price is trading at $1.83 today.

Qantas Airways Limited (ASX: QAN)

Analysts at Credit Suisse have retained their underperform rating and $3.00 price target on this airline operator’s shares. According to the note, the broker has concerns over the company’s prospects in the domestic market due to rising competition. It believes that Virgin Australia will be a strong competitor and notes the impending entry of Regional Express Holdings Ltd (ASX: REX) into the market. The Qantas share price is trading at $4.92 on Wednesday afternoon.

More reading

• ASX 200 shares hardest hit by COVID-19 in 2020
• Smile! 2021 will be an awesome year
• ASX 200 up 0.65%: Big four banks rise, tech shares charge higher, Flight Centre jumps
• 2 star stocks for your ASX retirement portfolio
• 8 issues that will impact investors in 2021: experts

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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In a year where the S&P/ASX 200 Index (ASX: XJO) just broke even, it’s worth having a look at shares that outperformed, and outperformed strongly.

These 3 ASX shares have smashed it out of the park this year, and here’s why.

Xero Limited (ASX: XRO)

One of Australia’s ASX darlings, Xero has steadily climbed its way from $80 a share at the end of 2019, to $145.63 at the time of writing — an impressive 82% return for the year.

Back in March, the workforce collectively gave up the daily commute for a short walk to their new home desk. Many businesses were forced to adopt a cloud-based environment. For many companies, it meant expanding upon their existing licenses for cloud-based software.

Xero was well placed for this shift, with the company now commanding a 2.453 million subscriber strong base (adding 396,000 new subscribers, year over year).

As reported in the company’s first half FY21 results, annualised monthly recurring revenue grew by 15% to $877.6 million, earnings before interest, tax, depreciation and amortisation (EBITDA) grew by 86% to $120.8 million, and net profit after tax skyrocketed to $34.486 million from $1.366 million the previous year.

Xero’s market capitalisation is $21.36 billion at the time of writing.

Mineral Resources Limited (ASX: MIN)

Not quite the size of Fortescue Metals Group Limited (ASX: FMG), Mineral Resources is often forgotten. Yet, the company has had a remarkable run of its own this year. The Mineral Resources share price has rocketed from $16.50 at the end of 2019 to $36.65 at the time of writing — that’s a 122% return.

Iron ore prices this year have marched forward with no reprieve. This is reflected in Mineral Resources’ reported revenue of $2.1 billion, up 41% on FY19. Where the numbers really start to shine in its annual report to shareholders is the net profit after tax – up from $165 million in 2019 to $1,002 million this year.

A couple of weeks ago UBS also initiated coverage on Mineral Resources with a “buy” recommendation, stating “MIN offers exposure to a growing mining services business and attractive commodities exposure to iron ore and lithium.”

Mineral Resources’ market capitalisation is currently $6.91 billion, while Fortescue Metals Group is $73.83 billion.

Lynas Rare Earths Ltd (ASX: LYC)

Passed up by Wesfarmers Ltd (ASX: WES) late last year (after the conglomerate originally offered a takeover bid of $1.5 billion), the Lynas share price lost its lustre and began to fall in early 2020. After kicking the year off at $2.29 a share, the Lynas share price fell as low as $1.065 in March. However, it has clawed its way back. Today Lynas shares are trading for $3.95 – a 71.88% return for the year.

The strong rally this year could be attributed to the ongoing trade tensions with China. Given Lynas is a rare earths supplier outside of China, it has positioned itself as an alternative.

Despite the company’s falling revenue and EBITDA, a 16% and 40.6% decline, respectively, the market appears to be focused on the long-term trend towards a higher demand for rare earth metals.

However, Lynas was recently downgraded to a “neutral” by UBS, which believes the rising electric vehicle market has already been priced into the current Lynas share price

More reading

• The top 5 performing ASX SaaS shares of 2020
• The Xero (ASX:XRO) share price is up 82% in 2020
• 2 ASX tech shares to buy and hold until 2030
• 3 unstoppable ASX shares to buy
• 2 rapidly growing ASX tech shares to buy

Mitchell Lawler owns shares of Lynas Limited. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Xero. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Spotify Technology (NYSE: SPOT)‘s business hasn’t skipped a beat amid the COVID-19 pandemic. Its stock price has more than doubled year to date as investors catch on to how meaningfully its podcast investments could pay off over time. 

Let’s recap 2020, dive into what’s to come, and then determine whether the stock is still a buy.

2020 wrapped

Spotify has had a phenomenal year despite the pandemic. The company’s total monthly active users (MAUs) were 29% higher at the end of September versus the prior-year quarter, and the midpoint of management’s fourth-quarter guidance suggests more than 26% MAU growth for the year. Within that figure, management expects Premium subscribers to grow 23%.

One of the big stories of the past year has been the company’s massive push into podcasting, specifically original and exclusive podcast content. This push began in earnest when Spotify spent 357 million euros ($436 million) to acquire the podcasting businesses Gimlet, Anchor, and Parcast in 2019.

But Spotify took that to another level this year with the acquisition of The Ringer, a podcast and media company started by Bill Simmons. It later signed Joe Rogan’s wildly popular program The Joe Rogan Experience to a multiyear deal that went exclusive with Spotify earlier this month. Kim Kardashian West and Michelle Obama were two other huge names that joined the platform in exclusive deals.

This hasn’t gone unnoticed by podcast listeners. In 2020, Spotify has overtaken Apple as the most widely-used podcasting platform, according to MIDiA Research. This rapid success has undoubtedly contributed to increasing investor enthusiasm toward the stock.

What’s to come

As we look forward to next year, we can probably count on more of the same out of Spotify. That should mean continued MAU and Premium subscriber growth as streaming audio adoption continues in the company’s 92 existing markets — and the service launches in new ones.

For example, Spotify launched in Russia and 12 other European regions last July. And the company just announced this month that the service will be launching in South Korea during the first half of 2021. For Spotify, South Korea is a large untapped market — one of the last major ones remaining.

In addition, we should expect more original and exclusive podcasting content. As Spotify’s user base continues to swell, and a growing percentage of users engage with its shows, the company is also going to have more ad inventory to sell to advertisers. On top of that, its Streaming Ad Insertion technology has the potential to meaningfully increase the value of podcast advertisements, which would boost the company’s revenue and profitability.

Yet another opportunity is the potential for price increases in select markets, which management has been telegraphing lately. On the company’s third-quarter earnings call, founder and CEO Daniel Ek said users have responded well to price increases in test markets. He went on to state, “So as a result, you’ll see us further expand price increases, especially in places where we’re well positioned against the competition, and our value per hour is high.”

Spotify hasn’t traditionally been thought of as a company with pricing power due to the existence of competing platforms like Apple Music, Amazon Music, and others. To the extent that view among investors changes, the company — and the stock — should benefit.

Is Spotify a buy?

Spotify stock has had a tremendous run in 2020, beginning the year at $150 per share and closing at $317 as of this writing.

Many investors would look at those gains and conclude they ‘missed out’, but Spotify still has a tremendous amount of growth ahead of it, both on the top and bottom lines. The podcast advertising initiative can pay off long term thanks to the high profit margins on each incremental ad impression sold. And investors shouldn’t overlook the company’s opportunity to sell more promotional services to artists and labels. Some of those revenue streams have “software-type margins,” according to Ek, which are far higher than the margins in the company’s core business.

With a huge global addressable market, margin-enhancing opportunities, and strong prospects for price increases, there’s a lot to like at Spotify over the next decade. Investors should still consider the stock a buy despite its triple-digit rally this year.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Andrew Tseng owns shares of Amazon and Spotify Technology. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Amazon, Apple, and Spotify Technology and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon. The Motley Fool Australia has recommended Amazon and Apple. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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