Is Spotify The New Netflix? Yes And No, Says MKM Partners

Streaming music platform Spotify Technology SA SPOT and Netflix, Inc. NFLX have more parallels than differences, according to MKM Partners. 

The Analyst

Analyst Rob Sanderson maintained a Buy rating on Spotify with an unchanged $245 price target.

The Thesis

Spotify and Netflix have two major structural differences, but four similar attributes, Sanderson said in a Tuesday note. (See his track record here.) 

What separates the two companies is that online music streaming services are direct substitutes with minimal content exclusivity and nearly zero overlap in subscriber bases, the analyst said. The gross margin profiles have dissimilar fixed-cost leverage, and Spotify doesn't require the cash infusions that Netflix needs for original film content, he said. 

On the other hand, the two companies have multiple parallels, Sanderson said: 

Similar, changing ecosystems in areas such as distribution and consumption.

Large players control a large amount of content.

The bullish case is based on the ability to scale to hundreds of millions of users along with interactive data collection.

Both companies held early leadership positions backed by talented management teams.

Much like Netflix, Spotify's long-term growth story will focus on subscriber growth, Sanderson said, although he said the trajectory should be less volatile than that of Netflix.

Netflix's global reach is larger than Spotify's, with more emerging regions, and Netflix offers investors a point estimate as opposed to Spotify's range estimates, the analyst said. Last, conversion data from user shifts from Spotify's freemium model to monthly subscriptions should offer better predictability, he said. 

Price Action

Spotify shares were down nearly 1 percent Tuesday afternoon at $161.88, while Netflix shares were up 2.37 percent at $357.39. 

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