Spotify Technology (NYSE:SPOT) and Verizon Communications (NYSE:VZ) are two companies of different business maturities. Verizon is a telecommunications giant and one of 30 members of the Dow Jones Industrial Average with a history that can be traced back over 100 years. Spotify, on the other hand, was founded in 2006 and is a fast-growing, unprofitable business trying to disrupt the audio industry.
But which one is the better stock for your portfolio? Let's take a look.
Founded in 2006 by current CEO Daniel Ek and Martin Lorentzon, Spotify is now the global leader in music and audio streaming. It operates in 178 markets globally, including 80 new ones that it just launched into this year, which puts Spotify in essentially every major country outside of China. As of the last updated numbers, Spotify has 356 million total monthly active users (MAUs) and 158 million paying subscribers around the globe, which is up from 131 million and 52 million, respectively, at the start of 2017.
Ek's stated goal is for Spotify to hit billions of users globally, so if you are an investor in Spotify, don't expect user growth to slow down anytime soon. In fact, if it does, that is a sign that Spotify is not executing on its business plans.
Spotify is currently not profitable, generating a $354 million operating loss on $9.5 billion in 2020 revenue. Right now management has decided to pour essentially all the gross profit Spotify generates back into the business, funding growth as it pushes to win users in new and existing markets, especially the 80 new ones it is opening the service in this year. With such a big opportunity ahead of it, investors shouldn't expect Spotify to generate meaningful profits in the short term.
Spotify is also investing hundreds of millions of dollars into podcasts. It has an exclusive deal with The Joe Rogan Experience, has acquired multiple studios, and owns two popular podcast distribution services called Megaphone and Anchor. Podcasts aren't a meaningful part of Spotify's business right now, but the segment could grow substantially over the next decade.
Verizon Communications is one of the three large telecommunications giants in the United States. It offers data and video services to its customers and is most well known for its smartphone internet plans that sit atop of Verizon's nationwide 4G and increasingly 5G network. While the majority of Verizon's business is consumer wireless plans, it also provides communications and data solutions to enterprises, sells home internet and cable TV subscriptions through Verizon Fios, and owns media assets including Yahoo! and AOL.
Last year, Verizon had $128.3 billion in sales, $28.8 billion in operating income, and generated $23.6 billion in free cash flow. With Verizon, investors shouldn't expect high sales growth, but steady cash flow generation and a slowly rising dividend, which is currently yielding 4.32%. In fact, unless Verizon acquires any high-growth businesses, it is almost guaranteed to not grow sales by very much over the next decade. There just aren't that many wireless customers left to acquire in the United States.
For most investors, Spotify is probably the optimal stock to own over the long term, simply because it has a huge runway of growth ahead of it as it tries to extend its lead in the global audio streaming market. With that being said, if you are looking for a low-volatility investment that pays a steady stream of dividend income, Verizon clearly trumps Spotify.
Verizon is a durable, predictable business with minimal competition. But Spotify has such a large opportunity to grow that, even if it is a riskier stock to bet on, the potential rewards could be worth it for long-term shareholders.