Apple Music: How Does It Compare To Spotify?

Apple Inc AAPL's Services category is a key growth driver for the company, with the segment seeing 24-percent revenue growth in fiscal 2017. Apple Music remains a core component of Apple’s Services, growing 91 percent year-over-year to $2 billion in revenue last year despite fierce competition from Spotify.

The Analyst 

Bernstein Analyst Toni Sacconaghi Jr. maintains a Market Perform rating on Apple with a $170 price target.

The Thesis

Revenue growth for Apple’s overall music business was "likely negative" in 2017, with the growth in Apple Music failing to cover a structural decline in iTunes, Sacconaghi said. The service is on a continued growth trajectory and could eventually turn around Apple’s entire music business, the analyst said. 

Apple Music could grow 70 percent in fiscal 2018 and 50 percent in fiscal 2019, contributing nearly 500 basis points annually to Services revenue growth, Sacconaghi said. This would allow Apples's music business to become "meaningfully accretive" to the Services segment and average revenue per user "for the first time in years," the analyst said. 

How Does Apple Music Stack Up Against Spotify?

At 36 million paid subscribers, Apple Music now has more than half the number of users as Spotify. Apple Music appears to be growing at a higher rate and enjoys a higher average revenue per user, according to Bernstein.

Spotify had a four-year head start on Apple Music in the US, launching in 2011. Both streaming services are growing at a faster rate than Netflix, Inc. NFLX and Sirius XM Holdings Inc. SIRI.

Although Apple Music is experiencing encouraging growth, its 18-20 percent margins are still less than what Apple is accustomed to in its Services category, where overall gross margins are a whopping 67 percent.

“Despite Apple Music's torrid growth rate, however, Spotify's public listing suggests that the market wouldn't necessarily ascribe a premium multiple to Apple Music, likely due to its low margins/profitability," Sacconaghi said.

A Bernstein analysis suggests that Apple Music contributes about 1 percent of total Apple revenues today. At a Spotify multiple, the service would be valued at $10 billion, or roughly 1 percent of Apple's total market cap, Sacconaghi said. 

Spotify is valued at approximately $20 billion.

While it is uncertain if music streaming growth has hit a saturation point, streaming now accounts for roughly 50 percent of total consumer music spending globally, pointing to significant growth opportunity in spending shifts and likely expansion within the category, Sacconaghi said. 

Price Action

Apple was down 0.32 percent at $178.39 at the close Tuesday.

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