Netflix and Spotify are not recession-proof
Netflix and Spotify demonstrate resilience in the current market landscape, yet they are not immune to the impacts of a recession. Securing victory in the competitive landscape of streaming services is a significant achievement. Countering a global recession presents a significantly different challenge. In a week marked by tariff-induced volatility, shares of Netflix and Spotify Technology have demonstrated resilience, outperforming many of their counterparts in the tech and media sectors. The resilience observed in subscription-based streaming services can be attributed to their immunity from the impact of increased duties on imported goods from foreign markets.
In a significant development, Netflix and Spotify have established a formidable presence in the market, boasting over half a billion subscribers collectively. This extensive subscriber base enhances their influence among content creators and audiences alike. Their competitive edge may not only persist but potentially strengthen during a recession, which could adversely impact less resilient rivals. In a report dated April 9, Justin Patterson of KeyBanc Capital Markets characterized Netflix and Spotify as strategic investments, highlighting their recurring revenue models, product cycles, and the trend of industry consolidation. However, it is important to note that resilience does not equate to immunity. The potential for a recession continues to loom, despite President Trump’s recent announcement of a 90-day suspension on numerous new tariffs, aimed at providing specific countries the opportunity to negotiate new agreements with the U.S. government. Despite the financial constraints faced by consumers, Netflix and Spotify remain among the final options that individuals would consider eliminating. Both platforms provide various pricing tiers, enabling subscribers to downgrade their plans in order to save some money.
The potential for negative impact is significant. According to consensus estimates from Visible Alpha, Netflix generates an average revenue of approximately $18 per month from each ad-free subscriber in North America. The company’s ad-supported plan is priced at less than 50% of the standard rate. Spotify’s free, ad-supported tier boasts a significantly larger user base compared to its paid subscription model. However, it is the paid subscribers who contribute a substantial 88% of the company’s total revenue, indicating that any shift towards lower-tier options could prove costly for the music streaming giant. In a recent report dated April 8, Doug Anmuth of JPMorgan has assigned buy ratings to both Netflix and Spotify. He emphasized that while these companies show promise, “there is no macro immunity in the Internet space, only degrees of resilience.” The majority of analysts have issued buy ratings for the two stocks in question. At 35 times and 45 times projected earnings respectively, Netflix and Spotify are commanding premium valuations, indicative of investor optimism regarding growth potential from their newer business lines. Spotify has made a strategic entry into the audiobook market and is set to introduce a new “super premium” service tier that will provide enhanced music streaming quality along with additional benefits for subscribers.
Netflix is actively pursuing the development of its advertising business, which has faced unexpected challenges despite the company’s substantial subscriber base. According to estimates from Visible Alpha, Netflix is projected to have generated slightly more than $1.8 billion in ad-supported revenue last year, representing approximately 5% of the company’s overall revenue. Anticipations are elevated for this enterprise: “I think you can say that 2025 is the year that we transition from crawl to walk,” stated Netflix co-Chief Executive Officer Greg Peters during the company’s most recent earnings call in January. Both companies are poised to demonstrate robust revenue and earnings growth in their upcoming first-quarter reports. In the near term, business prospects are expected to remain robust. Analysts are anticipating that Netflix will announce a revenue growth projection of 14% for the second quarter during its results report on Thursday. Meanwhile, Spotify’s report scheduled for April 29 is expected to reveal a forecast indicating a minimum growth of 19%, as per estimates from FactSet.
Netflix has set forth some notably ambitious objectives for the long-term future. Company executives have set ambitious targets, seeking to double revenue by 2030 while aiming to triple operating income within the same timeframe. According to internal plans revealed after an annual business review conducted last month, The Wall Street Journal reported on Monday. The recent fluctuations in tariffs have introduced a level of uncertainty into the economic outlook, complicating the landscape for companies eager to capture an expanding share of consumer discretionary spending. Netflix and Spotify have adeptly transformed their offerings into essential services for a significant user base. However, their future growth potential hinges on the ability of these users to increase their disposable income.
