Spotify Technology(NYSE: SPOT) operates the world's largest music streaming platform, whereas Netflix(NASDAQ: NFLX) is the dominant streaming provider for movies and TV shows. Spotify stock soared by 140% during 2024, and Netflix stock was up by 83%, with both of them ending the year near record highs.
Wall Street is forecasting solid revenue growth for both companies in 2025, and they are likely to build upon their leadership positions in their respective markets. Therefore, it's no surprise the analysts tracked by The Wall Street Journal have reached a bullish consensus on both stocks.
I share their enthusiasm, but there is one caveat investors should consider before diving in.
Image source: Getty Images.
The case for Spotify
According to Statista, Spotify has a global market share of 31.7% in the music streaming business. It's comfortably ahead of second-place Tencent, which has a market share of 14.4%. It can be challenging for music streaming platforms to differentiate themselves because they all offer similar content catalogs, so they can only stand out by charging less, offering other content, or delivering a unique user experience.
Spotify invests heavily in technologies like artificial intelligence (AI) to keep users engaged. AI powers the platform's content recommendation engine by learning what each listener likes. The company also uses AI to create unique features like AI Playlist, which allows users to type in a place, an activity, or even an emoji and receive a tailored list of songs compiled by its AI engine.
When it comes to other content, Spotify is already one of the world's largest podcasting platforms, and it's the second-biggest player in the audiobook space behind Amazon's Audible.
On Feb. 4, Spotify will report its official financial results for the final quarter of 2024. The company is on track to deliver a record $16 billion in revenue for the year, which would be a 17% jump from 2023. Wall Street's consensus forecast (according to Yahoo) suggests Spotify's annual revenue could reach another record of $18.4 billion in 2025.
But 2024 is also on track to be the most profitable year in the company's history. It delivered $795 million in net income through the first three quarters of the year, a positive swing from the $476 million net loss it delivered during the same period in 2023.
The Wall Street Journal tracks 38 analysts who cover Spotify stock, and 22 have assigned it the highest possible buy rating. Six more are in the overweight (bullish) camp, while eight recommend holding. Although two analysts have given the stock an underweight (bearish) rating, none recommend selling.
But here's the rub: The analysts have an average price target of $495 for Spotify stock over the next 12 months, which implies a gain of just 6% from where it trades as of this writing. Simply put, it's a little expensive right now because it trades at a price-to-sales (P/S) ratio of 5.8, which is a 52% premium to its average of 3.8 since the company went public in 2018:
That doesn't mean Spotify stock is a bad buy right now, it just means investors should plan to hold it for at least the next five years. The platform has around 640 million monthly active users, but management wants to grow that figure to 1 billion by 2030. If it's successful, the stock is likely to deliver plenty of upside between now and then.
The case for Netflix
Netflix is the world's largest streaming platform for movies and TV shows. It had 282.7 million paying subscribers at the end of the third quarter of 2024 (ended Sept. 30), so it's miles ahead of Walt Disney's Disney+, which sits in second place with 158.6 million subscribers.
Despite being the industry leader, Netflix continues to find new ways to attract subscribers. It launched an advertising-supported tier at the end of 2022 with a price tag of $6.99 per month to attract customers on lower incomes. It's much cheaper than the Standard tier ($15.49 per month) and the Premium tier ($22.99 per month), and it's proving extremely popular. During Q3, the ad tier accounted for half of all new signups in countries where it's available.
Additionally, Netflix invested heavily in live programming during 2024. It aired The Roast of Tom Brady in May, followed by the Mike Tyson vs. Jake Paul boxing match in November. Then it exclusively livestreamed both Christmas Day NFL games, which attracted an average of 26.5 million U.S. viewers each.
Netflix will report results for the final quarter of 2024 on Jan. 21. According to Wall Street's consensus forecast (provided by Yahoo), the company is on track to generate a record $38.9 billion in revenue for the year. It would represent 15.4% growth from 2023, marking an acceleration from the 6.6% growth it delivered in that year. I predict the company will credit the advertising tier and its live events for the strong result.
The Wall Street Journal tracks 55 analysts covering Netflix stock, and 25 have assigned it the highest possible buy rating. Seven more are in the overweight (bullish) camp, while 19 recommend holding. One analyst has assigned the stock an underweight (bearish) rating, and three recommend selling.
The analysts are bullish overall, but there is one caveat. Their average price target for Netflix stock is $850.19, which is below where it's trading as of this writing, implying no upside over the next 12 months. The Street's high target is $1,100, which suggests the stock could climb by 24%, but that is probably a best-case scenario.
From a valuation perspective, Netflix trades at a price-to-earnings (P/E) ratio of 49.8. That's significantly more expensive than the Nasdaq-100 technology index, which trades at a P/E ratio of 32.1. It's also much higher than Netflix's three-year average P/E ratio of 36.8:
None of this means Netflix stock is a bad buy -- nor does it mean Wall Street is wrong to be bullish. But investors who buy it now should plan to hold it for several years to maximize their opportunity to earn a positive return, because it's unlikely to soar by 83% in 2025 as it did in 2024.
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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 position in any of the 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.
