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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.
