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Better Buy: Spotify vs. Verizon

By Anders Bylund – Jul 14, 2020 at 8:39AM

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The tortoise doesn't always beat the hare.

Verizon Communications (VZ -1.77%) is a telecom giant with decades of experience and a meaty dividend. Spotify Technology (SPOT 2.00%) is a much younger streaming media specialist with skyrocketing sales and negative profits.

Verizon seems to be sailing through the COVID-19 pandemic relatively untouched while Spotify's stock more than doubled over the past three months. Are we comparing apples to oranges, or is one of these stocks simply a better buy than the other right now? Let's have a look.

One businessman runs on a green arrow pointing upward. Another stands still on a red arrow pointing down, head hung low.

Image source: Getty Images.

What's up with Verizon?

Verizon is a model of long-term stability. Big Red's trailing revenues haven't moved much in the last 5 years and the coronavirus lockdowns in the first quarter didn't hurt much. Verizon's total sales fell 1.6%, led by a 1.7% decline in consumer revenues and 0.5% lower business sales. Free cash flows clocked in at $3.6 billion in the first quarter, which works out to a 26% year-over-year increase. The company is well equipped to handle both short-term crises and longer downturns thanks to the predictable nature of long-term service contracts.

That being said, the health crisis caught Verizon at an awkward time. The company continues to build its 5G wireless services and fiber-optic backhaul networks but at a slower pace than originally planned. Consumer demand for a new type of high-end phone technology is low because of financial fallout from the pandemic, and system installation teams are slowed down by social distancing practices.

So Verizon is committed to its dividend policy but conserving cash elsewhere through a smaller increase in capital expenses and a halted stock buyback program. The dividend yield stands at a respectable 4.5% but analysts expect Big Red's earnings to hold steady over the next 5 years.

Assessing Spotify

The music-streaming expert is a very different beast. Spotify's sales shot 22.5% higher in the first quarter and its bottom-line losses halved year over year. Spotify's stock rose 8.4% on that impressive earnings performance but that surge drowned in the shadow of a more compelling event in June.

The stock jumped 30% higher in a three-day span due to a pair of blockbuster content deals. Reality star Kim Kardashian West will host a criminal justice podcast on Spotify and AT&T (T -1.69%) subsidiary DC Comics is developing an exclusive series of superhero podcasts for the platform. The company also spent $100 million on exclusive rights to the popular Joe Rogan Experience podcast in June. In short, Spotify is spending a lot of money on premium podcast content and investors expect a huge long-term return on that investment.

A smiling businesswoman sits at her laptop, surrounded by hundred-dollar bills raining down.

Image source: Getty Images.

Buy Spotify; stay away from Verizon

Spotify isn't a cheap stock, trading at nearly 23 times the company's book value and 186 times free cash flows. The company is earnings those sky-high multiples through massive revenue growth and ambitious long-term expansion plans. Spotify's 130 million active subscribers are a drop in the global bucket, where the company could end up serving billions of households around the world.

Verizon's financial stability might look good at first glance but the stock's long-term value looks hollow. Analysts don't even expect Verizon's earnings growth to keep up with inflation over the next half-decade, and that's a period that includes the large-scale rollout of next-generation wireless services. I don't see how Verizon expects to generate long-term shareholder value under these circumstances.

Spotify's high-octane growth story is still in its early chapters while Verizon's stale top line is pointing to flat returns for the foreseeable future.

Anders Bylund has no position in any of the stocks mentioned. 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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