Spotify (NYSE:SPOT) and Twitter (NYSE:TWTR) have both been disruptive digital platforms over the past decade. Spotify popularized streaming music and pulled listeners away from digital downloads and CDs, while Twitter changed how internet users consume news and how brands, celebrities, and politicians promote themselves.
Both platforms are controversial. Many musicians have repeatedly complained about Spotify's low royalty rates. Twitter has become a lightning rod for political polarization, misinformation, and hate speech.
Spotify stock has surged since going public in April 2018 via a direct listing with a reference price of $132 per share. It closed at $333.61 on Monday. By contrast, Twitter went public at $26 per share via a traditional IPO in November 2013. It jumped to $45 on the first day but still remains below $50 more than seven years later.
Past performance never guarantees future gains, though. Let's take a fresh look at both companies to see if Twitter can catch up to Spotify this year.
Both platforms are still expanding
Spotify's monthly active users (MAUs) rose 29% year over year to 320 million in the third quarter of 2020. Its premium subscribers grew 27% to 144 million, while the number of MAUs for its free ad-supported service rose 31% to 185 million.
Spotify generated 91% of its revenue from subscriptions during the quarter and the remaining 9% from ads. Its largest market is Europe, which accounted for 34% of its MAUs, followed by North America (25%), Latin America (22%), and the rest of the world (19%).
Twitter stopped disclosing its MAUs in 2019 and replaced the metric with "monetizable daily active users" (mDAUs) instead. It claims that metric weeds out fake accounts and bots, giving investors a clearer view of its underlying growth. Its mDAUs rose 29% year over year to 187 million in the third quarter of 2020.
Twitter generated 86% of its revenue from ads on its main platform during the quarter. The remaining 14% mainly came from its data licensing business -- which licenses a "firehose" of tweets to companies for analytics purposes -- and its MoPub mobile advertising network. It generated 55% of its revenue from the U.S. and the rest from overseas markets.
Neither company was profitable in 2020
Spotify's revenue rose 16% year over year to 5.71 billion euros ($6.94 billion) in the first nine months of 2020, but it posted a net loss of 456 million euros ($554 million) -- compared to a profit of 23 million euros ($28 million) a year earlier.
Spotify lost money for three reasons. First, its ad sales for free listeners decelerated throughout the pandemic as companies reined in their spending. Second, it ramped up its investments in podcasts to widen its moat against Apple Music and other competitors. Lastly, its content licensing costs remained high -- even as musicians claimed its royalty payments were too low.
Analysts expect Spotify's revenue to rise 15% in 2020 and 23% in 2021 but that its bottom line will remain in the red over that period. Its planned takeover of the podcast technology company Megaphone, which was announced last November, will exacerbate that pressure on its bottom line.
Twitter's revenue dipped 1% year over year to $2.43 billion in the first nine months of 2020. Like Spotify, Twitter's advertising revenue fell throughout the pandemic. But unlike Spotify, Twitter couldn't offset that slowdown with any subscription revenue.
On the bottom line, Twitter posted a whopping net loss of $1.36 billion -- compared to a profit of $1.35 billion a year earlier. However, that gap is exaggerated by a $1.1 billion tax benefit in 2019 and a $1.1 billion tax charge in 2020. Excluding taxes, it posted a net loss of $275 million in the first nine months of 2020, compared to a profit of $232 million in the prior-year period.
Twitter's late-2019 decision to ban all political ads likely throttled its growth in 2020. Facebook, which continued to sell political ads through the polarizing election cycle, grew its revenue and earnings 17% and 61%, respectively, in the first nine months of 2020.
Analysts expect Twitter's revenue to rise 4% for 2020 and 22% in 2021 as the pandemic passes and its ad business stabilizes. They expect it to post a full-year loss for 2020 but return to profitability next year.
However, D.A. Davidson analyst Tom Forte recently warned that Twitter's decision to ban former president Donald Trump could reduce its long-term profits by up to 10%. Potential changes to Section 230 of the Communications Decency Act, which shields social networks from legal actions regarding the actions of its users, could generate additional headwinds.
The valuations and verdict
Spotify trades at less than six times next year's sales, which makes it cheaper than many other high-growth tech stocks. Twitter trades at nearly nine times next year's sales and 53 times forward earnings.
Neither stock is expensive right now, but both companies face near-term challenges. I wouldn't rush to buy either stock right now, but I'd pick Spotify over Twitter in this market for four reasons: It's less controversial, it's generating stronger revenue growth, it's less dependent on ads, and it's a market leader in its industry instead of an underdog.