Which Is A Better Investment: Spotify or Netflix?

With so many people across the world limited to their homes for an extended period during the pandemic, entertainment options were a must. Television shows, movies, and podcasts have never been in more demand. Major streaming companies like Spotify (NYSE: SPOT) and Netflix (NASDAQ: NFLX) have managed to take advantage of this trend. However, is this growth sustainable?

Spotify: Bull vs Bear

In July 2020. music streaming giant Spotify reported 229 million active monthly users, with 138 million of them being paid users following 8 million additions in Q2 alone.

Spotify is still the clear leader in the audio streaming space and has a number of competitive advantages, such as its unique use of AI, data and analytics, and user-generated playlists. It is also becoming the leading player in the podcast space after recently announcing a $100 million deal with the world's most downloaded podcast: 'The Joe Rogan Experience'.

One concern is that its average revenue per user dropped 9% in the latest quarter. It has addressed this by upping its exposure in emerging markets by lowering prices, with family plans and bundles also playing a factor. Spotify CEO Daniel Ek clearly has lofty ambitions for the company. While there are already 229 million active users on board, he recently said: "There are still billions of people who have yet to discover on-demand music streaming or listen to a podcast." 

He believes that having a larger scale will lower user acquisition costs, with a virtuous cycle being created whereby listeners tell their friends about what they listen to and invite others to join the platform. With this level of demand, more creators will be attracted to the platform, improving the audio library. 

Spotify's pandemic success is reflected in its share price, which has almost doubled since March. 

Netflix: Bull vs Bear

Netflix has been a leader in on-demand television and movie streaming for many years. In recent times, more competitors have come to the market, such as Apple (NASDAQ: AAPL), Amazon (NASDAQ: AMZN), HBO and Disney (NYSE: DIS). 

For the first half of 2020, there was 110% subscriber growth, adding 25.8 million net subscribers -- which is already more subscribers so far in 2020 than it did in the entire of 2019.

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With a penetration rate of 65% in the U.S., Netflix is eyeing up other markets across the world. If it can achieve strong international growth, profit margins will likely increase as production costs are significantly lower in these regions and the markets are not as competitive.

Netflix is in the enviable position of being the first port of call for a lot of producers. This means that it can get their hands on the best ideas before any competitors. With many successful original shows of late, Netflix is showing no signs of slowing down production. Despite pandemic-related delays, more original content will be released in 2021 than this year on Netflix. This only bodes well for the future of the platform, as users will have incentives to continue subscribing.

Netflix's share price is hovering around the $500 mark, with investors taking a 'wait and see' approach for now.  

Which is the better investment?

Both companies clearly have a lot going for them and potential for growth. With Spotify continually entering previously untapped markets and with an established dominance in the audio streaming sector, it looks like it could be the safer investment option. 

Netflix is dealing with a surge of up-and-coming video streaming platforms and will continually have to stay ahead of the pack to maintain strong growth. While good share price performance is expected, Spotify looks to be the more concrete option.

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