A comparison between AT&T (NYSE:T) and Spotify Technology (NYSE:SPOT) involves two sharply different stories. Spotify stock rocketed from a 52-week low of $109.18 during March's pandemic-induced market drop to more than double its share price at the time of this writing.

In contrast, AT&T's stock plods along. Shares hit a low of $26.08 in March and currently hover between $28 and $29.

But stock prices don't tell the full story. To know which is the better investment, you've got to dig into both companies. Here's a look at how each is faring right now.

Young person wearing headphones sits outside while looking at a mobile phone.

Image source: Getty Images.

AT&T's pros and cons

AT&T has many appealing aspects. Investors gravitate toward the stock's dividend (now yielding about 7.3%), which has experienced 36 consecutive years of increases.

The company also generates billions of dollars in free cash flow (FCF). It exited the second quarter with FCF of $7.6 billion, nearly doubling the first quarter's $3.9 billion at the pandemic's outset.

The company's core telecom business generates most of its revenue. The wireless services segment consistently delivers over $13 billion every quarter. And this summer, AT&T rolled out nationwide coverage of its next-gen 5G wireless network.

The company's purchase of Time Warner in 2018 (now called WarnerMedia) put AT&T into significant debt, but the division is a key piece of AT&T's bundled wireless and entertainment services ecosystem. WarnerMedia recently launched HBO Max, a new streaming service, and packaged it with higher-priced wireless plans, driving up customer adoption of those more-expensive plans.

HBO Max also helped send total HBO subscribers past 36 million in Q2. The company targeted that total by the end of the year and meeting the goal so quickly highlights the new service's appeal.

Despite these factors, AT&T is weighed down by the debt it took on to make acquisitions, and it's expected to take several years to pay it down.

Along with its debt, AT&T must contend with the telecom industry's highly competitive environment. While the company grew its prepaid cell phone customer base in Q2, it lost subscribers from the more valuable postpaid segment.

  Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q2 2020
Postpaid Subscribers 75.5 million 75.2 million 75.2 million 75.1 million 74.9 million
Prepaid Subscribers 17.4 million 17.7 million 17.8 million 17.8 million 18.0 million

Data source: AT&T.

The Q2 postpaid subscriber decline represents the second consecutive quarter of subscriber losses. This trend is a key one to watch.

Spotify's growth story

Spotify's resilience in the face of a global pandemic contributed to its stock price growth. The company experienced mostly positive results in its second quarter thanks to a strong year-over-year increase in premium subscribers.

While Spotify's ad-supported income plunged 21% year over year as advertisers reduced spend in the pandemic's wake, this only represents 7% of company revenue. The loss was more than offset by its premium subscription income, which rose 17% year over year.

Premium-subscription revenue growth was powered by a 27% year-over-year increase in subscribers. Spotify has consistently grown subscribers over several quarters.

  Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q2 2020
Ad-Supported MAUs 129 million 141 million 153 million 163 million 170 million
Premium Subscribers 108 million 113 million 124 million 130 million 138 million

Note: MAUs = Monthly Active Users. Data source: Spotify Technology.

The keys to Spotify's success are twofold:

  • The company continues to expand into new international markets. It launched in Russia and a dozen other countries in the summer.
  • Spotify invests in experimentation, regularly testing new concepts. The company tripled the number of tests conducted over the past two years. Those that show promise receive further investment to expand and validate results before a full rollout.

This experimentation mindset led Spotify to extend beyond music into podcasts, and it now has 1.5 million shows with half having launched this year.

Spotify's key detractor is its lack of profitability, but it's common in the tech industry to sacrifice profits for growth. Spotify's focus on capturing new users has allowed it to achieve the largest market share in streaming music.

The final verdict

While AT&T has positives, the winner in this comparison is Spotify. It's poised to continue double-digit percentage growth thanks to its leadership in streaming music, which is how consumers prefer to listen to music, and its culture of experimentation. 

Income investors may be attracted to AT&T's high-yield dividend. But the company remains under pressure to pay down debt while battling nimble competitors such as T-Mobile, particularly amid a pandemic. AT&T has already closed retail stores and implemented layoffs to reduce expenses.

Looking at the pros and cons of each company, Spotify is the better investment.