Key Morningstar Metrics for Spotify
- Fair Value Estimate: $450.00
- Morningstar Rating: ★★
- Economic Moat: Narrow
- Morningstar Uncertainty Rating: High
A turn from loss to profitability has helped propel Spotify Technology SPOT stock up more than 200% since the start of 2024. The key question for potential investors is whether now is the right time to buy into the streaming music giant.
Spotify stock surged 154.7% in 2024, and its momentum has carried into 2025, with a 40.9% year-to-date return. In the background, the company staged a turnaround from consistent operating losses to profitability in 2024. That improvement came on the back of cost-cutting and increased subscriber growth.
“Spotify has had a great run of adding subscribers and saw sales growth accelerate over the past year, but the single biggest reason for the stock reaction, in our view, has been the huge move to profitability,” says Morningstar equity analyst Matthew Dolgin. “A huge rally was warranted, but we’d now say the rally is overdone,”
Why Has Spotify Stock Rallied?
Spotify began 2024 trading at $187.91 per share and has since more than tripled. The stock has fallen from a record high of $648.32 hit in mid-February, but shares are still up 214% since the start of 2024.
This rally has coincided with a significant change in Spotify’s fundamentals. Historically, the firm, which was founded in 2006 and went public in 2018, operated at a loss. The company posted a negative operating margin and profit in all but one of the previous eight quarters in 2022 and 2023, according to Dolgin.
In 2024, the company reversed this trend. Spotify posted an operating profit of EUR 1.4 billion in 2024 (with an 8.7% margin) after suffering hundreds of millions in operating losses in 2022 and 2023. That same year, net income turned positive for the first time, coming in at EUR 1.1 billion. Meanwhile, free cash flow reached EUR 2.3 billion in 2024, nearly quadruple 2023’s level and up from EUR 21 million in 2022.
"Not only has the profit growth come from cutting costs, but the company has reached such scale that it is getting some operating leverage on other fixed costs,” Dolgin says. He thinks the company will likely continue expanding margins through operating leverage and changes in revenue mix, “but we don’t think there’s much for fat to cut to reduce costs, so we expect the magnitude of profit growth to slow”
Still, Dolgin sees further growth potential: “We see room for Spotify to continue adding subscribers in most markets, as we think there’s substantial room to go before we reach something closer to full penetration for streaming music subscribers in most countries. We also think Spotify will look to raise prices more regularly after not doing so for most of its history.”
Spotify Stock Valuation
Trading at roughly $590 per share, Spotify stock is priced at 31% above Dolgin’s $450 estimate of its fair value. “It seems to us that the stock is now pricing in more of a continuation of recent results,” he says. “We think Spotify is great and will continue making good financial progress, but we expect the rate to slow. We don’t see a repeat of 2024.” As a result, at current prices, investors should approach Spotify stock “cautiously,” Dolgin says. ”But we could be interested in a pullback, because we see the company as best in breed.”
Spotify Stock vs. Morningstar Fair Value Estimate
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The following are highlights of Dolgin’s current outlook for Spotify and its stock. The full report and more of his coverage are available here.
Economic Moat
We assign a narrow moat rating to Spotify. In our view, the characteristics that make it so difficult for a streaming music platform to gain a competitive advantage support why Spotify, the clear current leader in the music streaming industry, has a moat and is unlikely to face a serious threat from competitors over the next several years. For Spotify, we see modest cost advantages, switching costs, and network effects. While we doubt any of these moat sources in isolation is a sufficient barrier to competitive pressure, collectively they make it unlikely that a competitor can eat into the leading global market share Spotify has attained.
Find more of Dolgin’s analysis of Spotify’s economic moat here.
Fair Value and Profit Drivers
We’re raising our fair value estimate for Spotify to $450 from $390, implying a P/E ratio of 46 and an EV/EBITDA multiple of 34 based on our 2025 forecast. Our fair value estimate uses the Feb. 4, 2025 exchange rate of $1.038/EUR to reconcile Spotify’s reporting currency to trading currency. We project Spotify to maintain double-digit top-line growth throughout our five-year forecast while growing profits and free cash flow at an even higher clip now that the firm has matured beyond its initial phase of growth.
We project premium revenue growth (from subscriptions) to slow from the 20% level it achieved in 2024 to a mid-teens rate throughout the rest of our forecast. Similar to what has occurred in 2024, we expect subscriber additions to remain high and for the firm to regularly increase prices. However, we expect a greater proportion of subscriber additions to come from lower-priced markets over time, resulting in lower growth in average revenue per subscriber than occurred in 2024.
Find more of Dolgin’s analysis of Spotify’s fair value estimate here.
Risk and Uncertainty
Our Morningstar Uncertainty Rating for Spotify is High. The biggest and most likely risks to Spotify, in our view, are that its dominance wanes or the broader audio streaming market slows. The firm’s high valuation depends on a long runway of rapid subscriber growth and price increases, in our view. We expect the firm to achieve this growth, but a greater push by the big technology companies that constitute Spotify’s biggest competitors or pushback from consumers on price increases would take air out of the Spotify story.
Find more of Dolgin’s analysis of Spotify’s risk and uncertainty here.
SPOT Bulls Say
- Spotify has significant room to continue raising prices after historically not doing so. The value is higher, and the price is lower for a Spotify subscription than nearly all video streaming services.
- Music streaming penetration in many countries is quite low, both in absolute terms and relative to uptake for video streaming services. This provides a long runway for further subscriber growth.
- Advertising revenue growth should pick up as Spotify’s podcasts are now being offered on other platforms, and targeting for ad-supported music customers is improving.
SPOT Bears Say
- Spotify is dependent on record labels, and there’s nothing proprietary about Spotify’s service. Over the long term, record labels could find a way to take a greater share of the industry’s profits.
- With record labels’ power and fixed percentages of revenue going toward music rights, Spotify’s ability to expand margins is limited.
- Spotify’s biggest competitors are major technology companies that don’t need to rely on music to be profitable. Integration in their ecosystems and bundles with other services could make their music streaming services more attractive than Spotify.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
Correction: A previous version of this story designated Shopify rather than Spotify in several places.
