Spotify (NYSE:SPOT) and Tencent Music Leisure (NYSE:TME) are two of the world’s largest streaming music corporations. Spotify, which is predicated in Sweden, serves 365 million month-to-month energetic customers (MAUs) throughout many of the world, however does not function in mainland China.
That is as a result of Tencent Music, which hosts 623 million cell MAUs on its streaming music platform, dominates the mainland Chinese language market. Its social leisure platform, which revolves round its reside streaming karaoke app WeSing, hosts a further 209 million cell MAUs.
Spotify and Tencent Music’s markets do not overlap, however they’re invested in one another by means of a share swap deal. Nonetheless, Spotify has fared a lot better since its public debut than Tencent Music.
Spotify went public through a direct itemizing in April 2018. Its inventory opened at $165.90, far above its reference value of $132, and is at the moment value about $220 per share. Tencent Music went public at $13 per share in Dec. 2018, however it’s now buying and selling at lower than $8 per share. Let’s have a look at why Spotify generated secure returns whereas Tencent Music’s inventory collapsed, and whether or not or not it is nonetheless a greater long-term funding.
Spotify’s enterprise is secure however unprofitable
Spotify’s income rose 16% to 7.88 billion euros ($9.24 billion) in 2020, then grew 20% 12 months over 12 months to 4.48 billion euros ($5.25 billion) within the first half of 2021. Spotify generates most of its income from paid subscriptions, which remained secure all through the pandemic, however the disaster quickly throttled its development in ad-supported income.
Spotify’s MAUs rose 22% 12 months over 12 months to 365 million within the second quarter of 2021. Its paid premium subscribers rose 20% to 165 million. Each development charges decelerated barely from the earlier quarter.
Spotify’s web loss widened from 186 million euros ($218 million) in 2019 to 581 million euros ($682 million) in 2020. However within the first half of 2021, its web loss narrowed from 355 million euros ($416 million) to 84 million euros ($99 million) as its promoting enterprise recovered, it benefited from a income shift from lower-margin licensed music towards higher-margin podcasts, and reined in its advertising bills.
For the complete 12 months, Spotify expects its complete MAUs to develop 16%-18%, and for its variety of premium subscribers to rise 14%-17%.
Spotify believes its full-year income ought to rise 18%-23%, but additionally for its working losses within the second half to wipe out its slim working revenue of 26 million euros ($30 million) within the first half of the 12 months. Briefly, Spotify’s development ought to stay secure, however it will not flip worthwhile anytime quickly.
Tencent Music’s enterprise is worthwhile however unstable
When Tencent Music went public, some buyers thought-about it to be a greater streaming music inventory than Spotify as a result of it was firmly worthwhile.
Tencent Music stayed within the black by subsidizing its on-line music platform with its social leisure platform. Merely put, it let its reside streaming and karaoke followers buy digital presents for his or her favourite entertainers, and used that higher-margin income to offset its increased music licensing prices.
Sadly, its social leisure section has posted year-over-year declines in cell MAUs for 5 consecutive quarters, whereas its variety of paying customers has fallen for 3 straight quarters. That ugly slowdown could be attributed to competitors from brief video apps like ByteDance’s Douyin (often called TikTok abroad) and different reside streaming platforms.
That slowdown pressured Tencent Music to aggressively convert the web music section’s free customers to paid ones. That technique persistently boosted the platform’s paid customers, however it’s additionally been shedding cell MAUs over the previous 5 quarters, and its common income per paying person stays stagnant.
Tencent’s income rose 34% to 25.43 billion yuan ($3.65 billion) in 2019, then grew 15% to 29.15 billion yuan ($4.47 billion) in 2020. Its income rose 19% 12 months over 12 months to fifteen.83 billion yuan ($2.45 billion) within the first half of 2021 because it gained extra paying on-line music subscribers.
Its adjusted earnings grew 18% in 2019, rose 1% in 2020, and solely elevated one other 1% year-over-year within the first half of 2021. Analysts anticipate its income to rise 11% this 12 months, however for its earnings to drop 21% because it loses extra higher-margin social leisure customers and surrenders its exclusive music licensing rights to appease China’s antitrust regulators.
The valuations and verdict
Spotify trades at about 4 occasions trailing 12-month (TTM) gross sales, whereas Tencent Music trades at lower than 7.3 occasions gross sales. Each shares look low-cost, however Tencent Music deserves to commerce at a low valuation as a result of its revenue engine has stalled out and its lack of unique licensing music rights will slim its aggressive moat. In the meantime, Spotify’s shift towards higher-margin podcasts — which generate extra advert income and cut back its dependence on pricey music licensing agreements — may repay.
I am not an enormous fan of both inventory proper now. But when I had to decide on one over the opposite, I would persist with Spotify, which ought to stay the world’s largest paid streaming music platform for the foreseeable future.
This text represents the opinion of the author, who might disagree with the “official” advice place of a Motley Idiot premium advisory service. We’re motley! Questioning an investing thesis — even one in every of our personal — helps us all assume critically about investing and make selections that assist us develop into smarter, happier, and richer.