Spotify (NYSE: SPOT) and Tencent Music Entertainment (NYSE: TME) are two of the world’s largest music streaming companies. Spotify, which is based in Sweden, serves 365 million monthly active users (MAU) in most countries around the world, but does not operate in mainland China.
This is because Tencent Music, which hosts 623 million mobile MAUs on its music streaming platform, dominates the market in mainland China. Its social entertainment platform, which revolves around its live karaoke app WeSing, hosts an additional 209 million mobile MAUs.
The markets of Spotify and Tencent Music do not overlap, but they are invested in each other through a share exchange agreement. However, Spotify has fared much better since its public debut than Tencent Music.
Image source: Getty Images
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 it is now trading at less than $ 8 per share. Let’s take a look at why Spotify delivered stable returns as Tencent Music shares plummeted, and whether or not this is a better long-term investment.
Spotify’s business is stable but unprofitable
Spotify’s revenue grew 16% to € 7.88 billion ($ 9.24 billion) in 2020, then 20% year on year to € 4.48 billion ($ 5.25 billion) dollars) in the first half of 2021. Spotify generates most of its revenue from paid subscriptions, which has remained stable throughout the pandemic, but the crisis has temporarily slowed the growth of its ad-supported revenue.
Spotify’s MAUs increased 22% year-on-year to 365 million in the second quarter of 2021. Its premium paid subscribers increased 20% to 165 million. Both growth rates slowed down slightly from 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. euros ($ 416 million) to € 84 million ($ 99 million) As its advertising business resumed, it benefited from a revenue transfer from licensed music to low margin towards higher margin podcasts, and kept its marketing expenses under control.
For the full year, Spotify expects its total MAUs to increase from 16% to 18% and its premium subscriber count to increase from 14% to 17%.
Spotify estimates that its annual revenue is expected to increase 18% to 23%, but also that its operating losses in the second half of the year erase its meager operating profit of 26 million euros ($ 30 million) in the first. semester. In short, Spotify’s growth should remain stable, but it won’t be 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 firmly profitable.
Image source: Getty Images.
Tencent Music has remained in the dark by subsidizing its online music platform with its social entertainment platform. Put simply, it let its live streaming and karaoke fans buy virtual gifts for their favorite artists, and used that higher margin income to offset its higher music licensing costs.
Unfortunately, its social entertainment segment has seen year-over-year declines in mobile MAUs for five straight quarters, while its paid user count has declined for three straight quarters. This horrific slowdown can be attributed to competition from short video apps like ByteDance’s Douyin (known as TikTok overseas) and other live streaming platforms.
This slowdown has prompted Tencent Music to aggressively convert free users in the online music segment to paid 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 paying 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 grew 19% year-over-year to 15.83 billion yuan ($ 2.45 billion) in the first half of 2021 as it gained more subscribers paid to online music.
Its adjusted profits rose 18% in 2019, rose 1% in 2020, and grew only a further 1% year-on-year in the first half of 2021. Analysts expect its revenue to grow 11% this year, but that its profits decline. 21% because it loses more higher margin social entertainment users and abandons its exclusive music license rights to appease China’s 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 the loss of its exclusive music license rights will narrow its competitive gap. Meanwhile, Spotify’s shift to higher-margin podcasts – which generate more ad revenue and reduce its reliance on expensive music licensing deals – could pay off.
I’m not a big fan of either of these actions at the moment. But if I had to choose one over the other, I would stick with Spotify, which should remain the biggest paid in the world. streaming music platform for the foreseeable future.
10 stocks we prefer at Tencent Music Entertainment Group
When our award-winning team of analysts have stock advice, it can pay off to listen. After all, the newsletter they’ve been running for over a decade, Motley Fool Equity Advisor, has tripled the market. *
They have just revealed what they believe to be the ten best stocks that investors are buying right now … and Tencent Music Entertainment Group was not one of them! That’s right – they think these 10 stocks are even better buys.
* The portfolio advisor returns on August 9, 2021
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.