Spotify Stock Soars 124% in a Year: Time to Buy, Hold or Fold?
Spotify Technology S.A. SPOT shares have surged 123.7% in a year, outperforming the 37.3% rally of its industry and the 13.2% rise in the Zacks S&P 500 Composite.
It is noteworthy that the SPOT stock has outperformed its streaming rivals Apple AAPL and Amazon AMZN in the past year. Amazon has gained 16.2%, while Apple has declined 1.7% in the said period.
1-Year Price Performance
The explosive rise experienced by Spotify must be highly appealing to investors. The question of whether one should buy the stock or stay away from it needs to be answered now. Let us analyze further to come to a conclusion.
SPOT's Robust User Engagement
Spotify's monthly active users (MAUs) in the first quarter of 2025 increased 10% year over year to 678 million. Premium subscribers witnessed 12% year-over-year growth in the said quarter. These metrics are a testament to the rising appeal of the company's platform among users globally. The main driver of this growth is the strategic focus that the company has given on emerging markets like Latin America and the Rest of World. The marketing strategies invoked by the company act well with new users in these high-potential regions, ensuring a continuous user influx.
We believe that the company's aim to reach a billion users across the globe by 2030 is achievable, given the trend that its user engagement is following continues to do so. Hence, its ability to grab long-term growth opportunities via geographic diversification and its ability to gain a competitive edge over Apple and Amazon will be instrumental to its growth trajectory.
Management is optimistic about user growth and anticipates the total MAUs to increase by 11 million in the second quarter of 2025. It expects to add 5 million users in premium subscribers in the same quarter. This positive outlook translates into strong user appeal and retention in the long haul, a vital trait required to tackle major industry players.
Spotify's Promising Top & Bottom-Line Prospects
The Zacks Consensus Estimate for SPOT's 2025 and 2026 revenues is pegged at $19.9 billion and $22.8 billion, implying 17.6% and 14.3% year-over-year growth, respectively. The consensus estimate for Spotify's 2025 and 2026 earnings per share stands at $9.94 and $13.95, suggesting 67.1% and 40.3% year-over-year increases, respectively.
SPOT's Liquidity & Profitability Lag Industry
Spotify's current ratio at the end of the first quarter of 2025 stood at 1.48, which might be appealing to investors. However, comparing it with the industry may present a different perspective. The industry average is 2.38, over 1.5 times higher than SPOT's current ratio. Compounding this concern, the metric has declined 21% from the preceding quarter. Investors may overlook the declining trend since the metric exceeds 1. However, if the downturn continues, it may hurt the company's liquidity position in the long run.
Return on equity (ROE) is a profitability metric that assesses how effectively a company utilizes shareholders' equity to generate earnings. By the end of the first quarter of 2025, SPOT reported an ROE of 22.5%, falling behind the industry's 32.3%. In addition, investors may be worried about the decline in this metric by 310 basis points from the preceding quarter.
Spotify Stock Looks Pricey
SPOT is priced at 60.5 times forward 12-month earnings per share, which is higher than the industry's average of 39.7 times.
Image Source: Zacks Investment Research
When looking at the trailing 12-month EV-to-EBITDA ratio, Spotify is trading at 68.3 times, far exceeding the industry's average of 14.5 times.
Metrics as such signal valuation concerns for investors, which can limit their willingness to invest in Spotify.
Verdict: Hold Your SPOT for Now
Spotify's user base expansion is instrumental to its success as it positions the company to gain a competitive edge over industry giants like Amazon and Apple. The company provides a strong top and bottom-line outlook, which favors its long-term growth objective. However, liquidity and profitability lag the industry, which may raise red flags.
We recommend investors take a cautious approach and initiate a 'Hold' strategy on the grounds of a premium valuation. Increasing exposure is suggested after signs of lasting growth and a more attractive valuation appears.
Spotify carries a Zacks Rank #3 (Hold) at present. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
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