Spotify (NYSE: SPOT) and Tencent Music Entertainment (NYSE:TME) are two of the largest streaming music companies in the world. Spotify, which is based in Sweden, serves 365 million monthly active users (MAUs) in most of the world, but does not operate in mainland China.
Indeed, Tencent Music, which hosts 623 million mobile MAUs on its music streaming platform, dominates the mainland China market. Its social entertainment platform, which revolves around its WeSing live karaoke app, hosts an additional 209 million mobile MAUs.
Spotify and Tencent Music’s markets do not overlap, but they are invested in each other through a share swap agreement. However, Spotify has fared much better since its public debut than Tencent Music.
Spotify went public via a direct listing in April 2018. Its stock opened at $165.90, well above its benchmark price of $132, and is currently worth around $220 per share. Tencent Music went public at $13 per share in December 2018, but now trades below $8 per share. Let’s take a look at why Spotify generated steady returns while Tencent Music’s stock slumped, and whether or not it’s a better long-term investment.
Spotify’s business is stable but not profitable
Spotify’s revenue grew 16% to €7.88 billion ($9.24 billion) in 2020, then grew 20% year-over-year to €4.48 billion. ($5.25 billion) in the first half of 2021. Spotify generates the bulk of its revenue from paid subscriptions, which have held steady throughout the pandemic, but the crisis has temporarily dampened its revenue growth funded by advertising.
Spotify’s MAUs were up 22% year-over-year to 365 million in the second quarter of 2021. Its paid premium subscribers were up 20% to 165 million. Both growth rates slowed slightly compared to the previous quarter.
Spotify’s net loss fell from 186 million euros ($218 million) in 2019 to 581 million euros ($682 million) in 2020. But in the first half of 2021, its net loss fell from 355 million. from euros ($416 million) to 84 million euros ($99 million) as its advertising business recovered, it benefited from a transfer of income from low-margin licensed music to higher margin podcasts, and controlled its marketing expenses.
For the full year, Spotify expects its total MAUs to increase by 16-18% and its number of premium subscribers to increase by 14-17%.
Spotify estimates full-year revenue to rise 18% to 23%, but also expects second-half operating losses to wipe out its meager €26 million ($30 million) operating profit in the first semester. In short, Spotify’s growth should remain steady, but it won’t turn profitable anytime soon.
Tencent Music’s business is profitable but unstable
When Tencent Music went public, some investors considered it a better streaming music stock than Spotify because it was decidedly profitable.
Tencent Music stayed in the dark by subsidizing its online music platform with its social entertainment platform. Simply put, it allowed its live streaming and karaoke fans to buy virtual gifts for their favorite artists and used those higher-margin revenues to offset its higher music licensing costs.
Unfortunately, its social entertainment segment saw a year-over-year decline in mobile MAUs for five consecutive quarters, while its number of paid users fell for three consecutive quarters. This nasty slowdown can be attributed to competition from short-form video apps like ByteDance’s Douyin (known as TikTok overseas) and other live-streaming platforms.
This slowdown prompted Tencent Music to aggressively convert free users in the online music segment into paying users. This strategy has consistently boosted the platform’s paid users, but it has also lost mobile MAUs over the past five quarters, and its average revenue per paid user remains stagnant.
Tencent’s revenue grew 34% to 25.43 billion yuan ($3.65 billion) in 2019, then 15% to 29.15 billion yuan ($4.47 billion). ) in 2020. Its revenue increased 19% year-on-year to 15.83 billion yuan ($2.45 billion) in the first half of 2021, as it earned more than paying subscribers to online music.
Its adjusted profit rose 18% in 2019, rose 1% in 2020 and rose only 1% year-over-year in the first half of 2021. Analysts expect its revenue increase by 11% this year, but its income is falling. 21% as it loses more higher-margin social entertainment users and abandons its exclusive music licensing rights to appease Chinese antitrust regulators.
The evaluations and the verdict
Spotify is trading at around four times 12-month sales (TTM), while Tencent Music is trading at less than 7.3 times sales. Both stocks look cheap, but Tencent Music deserves to trade at a low valuation because its profit engine has stalled and its loss of exclusive music licensing rights will reduce its competitive moat. Meanwhile, Spotify’s shift to higher-margin podcasts — which generate more advertising revenue and reduce its reliance on expensive music licensing deals — could pay off.
I’m not a big fan of either stock right now. But if I had to choose one over the other, I’d stick with Spotify, which is expected to remain the largest paid network in the world. streaming music platform in the foreseeable future.
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