Streaming services have proven quite popular in recent years. However, the popularity of streaming services reached new levels during the pandemic, with everyone quarantined in their home. Contrary to popular opinion, the overwhelming majority of those living in the United States subscribe to at least one streaming service. A growing number of households subscribe to multiple streaming services.

Part of the beauty of investing in streaming companies is the fact that they have subscription-based business models that rake in cash, banking on the fact that most consumers “set it and forget it.” This means the typical consumer sets up streaming subscriptions and allows monthly billing to continue recurring with no definitive end date. 

Here is a look at two of the top streaming services in Netflix (NFLX - Get Rating) and Spotify (SPOT - Get Rating).

Netflix (NFLX - Get Rating)

Though NFLX’s recent quarterly numbers disappointed, it should not come as a surprise that the stock did not meet expectations. It would be quite an amazing feat if NFLX matched its subscription numbers from the initial pandemic quarters. The underwhelming subscription figures are not an indictment of NFLX’s business model. Rather, the unexpectedly low numbers result from some people watching less as the pandemic winds down.

NFLX has an overall grade of B, which translates into a Buy rating in our POWR Ratings. The company has a grade of B in the Quality, Sentiment, and Growth components. We also grade NFLX based on Stability, Momentum, and Value. You can find those grades by clicking here. NFLX is ranked #7 in the Internet industry. You can find other top stocks in this industry by clicking here.

NFLX has an average analyst target price of $609.95. If the stock reaches this target, it will have popped by slightly more than 20%. It is particularly interesting to note the average analyst target price for NFLX has jumped $60.66 in the past four months. Of the 42 analysts who cover NFLX, 14 consider the stock a Strong Buy and 20 consider it a Buy,

Spotify (SPOT - Get Rating)

SPOT, a music streaming service, is ranked 4th in the Entertainment – Radio industry. Investors can find other top stocks in this industry by clicking here. SPOT has an overall grade of C, translating into a Neutral rating in the POWR Ratings system. It has a grade of B in the Sentiment component and a C in the Momentum and Value components. You can find out how SPOT fares in the rest of the components by clicking here.

According to the analysts who have cover the stock is currently undervalued. The average analyst price target is $282.53, indicating a potential 8% upside. The stock’s average target price has soared $125.90 across the prior half-year. SPOT’s secondary platform that provides podcasts is also worthy of mention. Podcasts are revenue drivers as they feature advertisements targeted to specific consumer demographics. It is even possible that SPOT could eventually make more money from its podcasts than its streaming music service.

SPOT dipped after its first-quarter earnings even though its revenue was impressive and its monthly active users hit 356 million. However, the company’s guidance for monthly active users was lowered from 427 million to 422 million for the entire year. The silver lining is SPOT’s user growth jumped 24% on a year over year basis. In particular, ad-supported monthly active user figures climbed 27% on a year over year basis. All in all, SPOT’s paying subscribers increased by 21%, hitting 158 million.

Which is the Better Investment?

NFLX is the better pick right now. NFLX has a Buy rating, while SPOT is rated Neutral. NFLX also has stronger POWR Ratings components. 

NFLX shares were trading at $504.14 per share on Friday morning, up $4.59 (+0.92%). Year-to-date, NFLX has declined -6.77%, versus a 13.04% rise in the benchmark S&P 500 index during the same period.

About the Author: Patrick Ryan

Patrick Ryan has more than a dozen years of investing experience with a focus on information technology, consumer and entertainment sectors. In addition to working for StockNews, Patrick has also written for Wealth Authority and Fallon Wealth Management. More...

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