Spotify Beats Netflix on Profitability: Investors Eye Margin Growth

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Spotify and Netflix are diverging on strategy, with Spotify emphasizing sustained subscriber growth and expanding margins while Netflix leans into advertising. Spotify achieved over 300 million subscribers, targeting 35% to 40% gross margins by 2030. This comes as the company maintained flat headcount for three years, focusing on new revenue streams like Audiobooks+ and ticketing features. Subscriber revenue grew 15% year-over-year to $4.99 billion, with Average Revenue Per User (ARPU) climbing 7% to $5.63.

Netflix, valued significantly higher, posted a $12.56 billion revenue, slightly below estimates, though all regions showed double-digit growth. The company anticipates its advertising revenue to roughly double by 2026 to $3 billion, with its ad tier accounting for over 60% of new sign-ups. While content spend is projected to increase by approximately 10% this year, including live sports, Netflix's overall strategy appears more centered on a spend-to-scale approach compared to Spotify's focus on operating leverage.

Spotify's market capitalization, down 26% over the past year to $107 billion, offers potential asymmetric upside relative to Netflix's current $317 billion valuation. The streaming giant's gaming engagement for kids also saw a 600% year-over-year increase.