2023-07-16 09:32:00 ET
Two digital media companies have been materially outperforming their legacy media peers this year -- but heading into second-quarter earnings, KeyBanc likes Spotify ( NYSE: SPOT ) over Netflix ( NASDAQ: NFLX ) for continued upside.
Rivals including Disney ( DIS ), Warner Bros. Discovery ( WBD ), Paramount ( PARA ) ( PARAA ), Comcast ( CMCSA ), Universal Music ( OTCPK:UMGNF ) and Warner Music Group ( WMG ) have lagged in 2023 behind the showings of Netflix ( NFLX ) and Spotify ( SPOT ), up 50% and up 110% respectively, analyst Justin Patterson notes.
That measure holds not only year-to-date, but Netflix ( NFLX ) and Spotify ( SPOT ) have also outperformed those companies and the overall market since the start of the second quarter as well.
The stocks have benefited from streaming media catalysts: In Netflix's case, the advent of its password crackdown (paid sharing) and the revenue stream it promises -- and for Spotify it includes cost cuts, pricing changes and the introduction of new plan types.
But Patterson prefers Spotify (Overweight rating) based on a belief that many investors still doubt: that the company can achieve profitability in 2024 and beyond.
As for Netflix (Sector Weight), "by contrast, we believe investors are already pricing in a [free cash flow] inflection from paid sharing and may be overly optimistic about comping this unique event in 2024."
He's reflecting the impact of paid sharing on Netflix ( NFLX ) by boosting expected 2023 revenue by 1% and 2024 by 2%, and raising expected earnings per share by 5% and 6% respectively. Similarly, he's boosting expected free cash flow to an above-consensus $3.9B in 2023 and $6B in 2024, and sees upward bias to revenue estimates.
Still, shares are at a price/earnings ratio of 29.8 (for 2024) and "we believe the revision cycle is increasingly priced in, whereas future risks (e.g., less new content amid strikes, pull-forward) are being overly dismissed."
As for Spotify ( SPOT ), he's lowering revenues estimates by 0.3% in 2023 and 2024 to reflect price-increase timing -- but boosting 2024 operating profit to €84M from a previous €59M thanks to progress on savings and gross margins.
That expected profit ramp leads to an increased price target of $205, implying 19% upside.
More on Spotify and Netflix
- Deeper Dive: The music industry is growing louder
- Spotify user growth 'surprisingly strong' heading into Q2: analyst
- Spotify evaluating adding music videos to its app
- Netflix rises as UBS boosts estimates, citing 'positive data' on paid sharing
- Netflix rises as Morgan Stanley boosts estimates on higher expectations
- Netflix's 'less compelling' content may offset paid subscriber tailwinds
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In digital media earnings look, it's Spotify over Netflix for KeyBanc