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Better Buy: Verizon Communications vs. Spotify

By Robert Izquierdo – Apr 16, 2020 at 6:55AM

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Each company offers investors different benefits. Find out which comes out on top.

Verizon Communications (VZ -1.73%) is a telecom giant. Spotify (SPOT -0.62%) is a streaming music and media platform. While the two companies have little in common, both are among the leaders in their respective industries.

Also, both are at different points in the maturation of their respective businesses. Consequently, in contrasting these two, different factors drive the investment attractiveness of each. Let's take a look at these factors to determine which is the better buy.

A young person leaning against a post outdoors wearing red headphones while looking at a mobile phone.

Image source: Getty Images.

Spotify's growth

While Spotify has been around for years, it's still in growth mode. In its latest earnings report, for the fourth quarter 2019, the company saw year-over-year growth across many areas of its business.

Revenue grew by 24% year over year. The number of monthly active users (MAUs) increased by 31% to 271 million users. Those paying for Spotify's premium subscription service, a source of recurring revenue for the company, grew 29%. Its gross profit was up 19%, and free cash flow ballooned by 101%.

These growth numbers are impressive, and its 2019 increase in MAUs is even better than 2018's year-over-year rise of 29% when the company reached 207 million users. The increase in MAUs is key because the larger the audience, the greater the company's opportunity to capture more premium subscribers as well as generate increased revenue through its advertising-supported model.

Spotify is now focused on continuing growth through its podcast audience. The number of streamed podcast hours rose nearly 200% year over year for the quarter, and the company stated that podcast use is helping to convert free users to paid subscribers. At minimum, the increase in podcast use will help Spotify's ad-supported revenue stream, which grew 23% year over year in Q4 and now includes a new tool for podcast advertising.

Even with impressive growth numbers, Spotify was not profitable. The company explained that this was due to an 80% year-over-year increase in operating expenses driven by social charges. These charges are related to stock-based compensation and apply in several countries where Spotify operates, including its home base of Sweden, which accounted for the bulk of these payroll taxes.

Verizon's stability

Verizon is a mature business in a saturated market, and as a result, it won't experience the kind of year-over-year growth that Spotify enjoys. For the fourth quarter of 2019, Verizon saw a 1.4% year-over-year revenue increase.

Consequently, Verizon's approach to its business is significantly different from Spotify's. Since most of the consumer population already own a mobile device, Verizon's big growth opportunity is to upgrade its wireless network from the current 4G to 5G. Doing so means consumers will be attracted to Verizon's stronger, faster network and adopt new 5G-compatible devices. That's why the company is accelerating its deployment of 5G technology.

But rolling out new technology is costly, so one of Verizon's 2020 objectives is to strengthen its financial health. Hence, Verizon plans to achieve $10 billion in cumulative cash savings by 2021. So far, the company has captured $5.7 billion in savings, and 2019 saw its best cash flow from operations since 2015.

The emphasis on its financial health means Verizon can continue to fund its dividend and support future increases. The dividend yield is currently at a robust 4.28%, and the company announced a share repurchase program in February.

The final verdict

Spotify and Verizon are two technology stocks at different stages in their respective business life cycles. The former appeals to growth investors while the latter, with its dividend, proves more attractive to income investors. Which is the better buy depends largely on your investment approach.

Spotify's double-digit growth and continued push into new revenue opportunities (like podcasts) are indicators that its fortunes will continue to benefit in the near term. It will have to address its fiscal health over the long run, however.

Verizon's opportunities with 5G combined with its emphasis on rewarding investors through share repurchases and continued dividend growth, which it has done for 13 years, offer a different kind of investment. Verizon is a steady, predictable business, and its consideration of investors is appealing. That's why I see Verizon as the long-term better buy between the two.

Robert Izquierdo has no position in any of the stocks mentioned. The author's spouse works at Verizon Communications. The Motley Fool owns shares of and recommends Spotify Technology. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Verizon Communications Inc. Stock Quote
Verizon Communications Inc.
VZ
$37.97 (-1.73%) $0.67
Spotify Stock Quote
Spotify
SPOT
$86.30 (-0.62%) $0.54

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