Analyzing the Future of Streaming: Spotify vs. Netflix

Spotify Technology (NYSE: SPOT) operates the world’s largest music streaming platform, while Netflix (NASDAQ: NFLX) leads in movies and TV shows streaming. Spotify’s stock climbed by 140% in 2024, while Netflix’s increased by 83%, with both companies reaching near-record highs by the year’s end.

Wall Street predicts strong revenue growth for both firms in 2025, likely enhancing their dominance in the industry. Analysts tracked by The Wall Street Journal have a positive outlook on both stocks.

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I share their excitement, but potential investors should be cautious before making a move.

Image source: Getty Images.

Why Investors Are Optimistic About Spotify

Statista reports that Spotify currently holds a global market share of 31.7% in the music streaming sector, far surpassing second-place Tencent, which captures 14.4%. Given that most music streaming platforms offer similar catalogs, companies often compete on pricing or unique user experiences.

Spotify invests significantly in advanced technologies like artificial intelligence (AI) to keep its users engaged. For example, AI drives the platform’s recommendation engine, tailoring suggestions to individual tastes. Additionally, Spotify features tools like AI Playlist, where users can input a location, an activity, or even an emoji to receive a personalized song list.

In addition to music, Spotify is also a major player in podcasting and the second-leading provider in audiobooks, following Amazon‘s Audible.

On February 4, Spotify will release its financial results for the final quarter of 2024. The company is poised to hit a record $16 billion in revenue for the year, a 17% increase from 2023. Projections by Wall Street (according to Yahoo) indicate that Spotify’s revenue could reach $18.4 billion in 2025.

Additionally, 2024 is expected to be Spotify’s most profitable year to date. The platform reported $795 million in net income during the first three quarters, a significant improvement from a $476 million net loss during the same period last year.

Currently, The Wall Street Journal reports that out of 38 analysts covering Spotify stock, 22 have assigned a strong buy rating. Six are classified as overweight (bullish), while eight recommend holding. Two analysts have issued an underweight (bearish) rating, but none suggest selling.

That said, analysts predict an average price target of $495 for Spotify’s stock over the next 12 months, indicating only a 6% potential upside from its current trading price. The stock has a price-to-sales (P/S) ratio of 5.8, reflecting a 52% premium compared to its average of 3.8 since its IPO in 2018.

SPOT PS Ratio data by YCharts

While this doesn’t inherently indicate that Spotify stock is a poor investment, it suggests that buyers should plan to hold it for at least five years. The platform benefits from approximately 640 million monthly active users, with management aspiring to increase that number to 1 billion by 2030. Successful execution of this plan could drive significant stock growth.

Netflix’s Expansion Strategy

Netflix remains the largest platform for streaming movies and TV shows, boasting 282.7 million paying subscribers as of the third quarter of 2024 (ending September 30). This puts it well ahead of Walt Disney‘s Disney+, which has 158.6 million subscribers.

Despite its leading position, Netflix continues to innovate to attract new subscribers. In late 2022, it launched an advertising-supported tier priced at $6.99 per month, appealing to budget-conscious viewers. This option, significantly cheaper than the standard and premium plans, has become quite popular, accounting for half of all new sign-ups in markets where it’s offered during Q3.

Furthermore, Netflix focused on live programming in 2024. It broadcast The Roast of Tom Brady in May, followed by the Mike Tyson vs. Jake Paul boxing match in November. It also livestreamed both Christmas Day NFL games, attracting an average of 26.5 million viewers in the U.S. for each game.

Netflix is set to announce its final quarter results for 2024 on January 21. Predictions from Wall Street (provided by Yahoo) suggest that the company will achieve $38.9 billion in revenue for the year, marking a 15.4% growth over 2023. This would be an acceleration from the 6.6% growth it experienced that year, likely credited to the success of its advertising tier and live events.

According to The Wall Street Journal, 55 analysts are currently tracking Netflix stock, 25 of whom have assigned the strongest buy rating. Seven are classified as overweight (bullish), while 19 suggest holding. One analyst has assigned an underweight (bearish) rating and three recommend selling.

While the overall sentiment is positive, there are also reservations. The average price target for Netflix stock is $850.19, which is below its current trading price, suggesting no expected upside in the next year. The highest target among analysts is $1,100, representing a potential gain of 24%, which many consider a best-case scenario.

On the valuation front, Netflix currently trades at a price-to-earnings (P/E) ratio of 49.8, much higher than the Nasdaq-100 technology index’s 32.1 and above its three-year average P/E of 36.8.

NFLX PE Ratio data by YCharts

All this doesn’t imply that Netflix stock is undesirable nor that Wall Street’s enthusiasm is misplaced. Yet, prospective buyers should be prepared to hold their investment for several years to see positive returns, as it’s unlikely to replicate the 83% growth seen in 2024.

Is Now the Right Time to Invest $1,000 in Spotify Technology?

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Anthony Di Pizio has no positions in any stocks mentioned. The Motley Fool has positions in and recommends Amazon, Netflix, Spotify Technology, Tencent, and Walt Disney. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.