Is Spotify Still Attractive After Its 727.6% Three Year Surge and Profitability Push?

• If you are wondering whether Spotify Technology is still worth considering after its big run, or if the easy money has already been made, you are in the right place to unpack what the current share price really implies.
• The stock just closed around $598.87 and has surged 30.8% year to date and 727.6% over three years, even though it has dipped 6.4% over the last month and bounced 6.8% in the past week.
• Those swings are happening as investors digest Spotify's push into profitability, its price hikes across key markets like the US and Europe, and strategic bets on audiobooks and podcasting that are reshaping its revenue mix. At the same time, market chatter about the streaming landscape and competition from Apple and Amazon is keeping sentiment lively, adding both excitement and uncertainty around the stock.
• On our framework Spotify scores a 3/6 valuation check score, suggesting it looks undervalued on some metrics but not all. Next we will break down what different valuation approaches say about that price tag, and then circle back to a more powerful way to judge value than any single model alone.

Spotify Technology delivered 24.7% returns over the last year. See how this stacks up to the rest of the Entertainment industry.

Approach 1: Spotify Technology Discounted Cash Flow (DCF) Analysis

A Discounted Cash Flow, or DCF, model estimates what a company is worth by projecting the cash it can generate in the future and then discounting those cash flows back to today. For Spotify, the model used is a 2 Stage Free Cash Flow to Equity approach based on cash flow projections.

Spotify generated about €2.9 billion in free cash flow over the last twelve months, and analyst forecasts combined with extrapolations suggest this could rise to roughly €9.2 billion by 2035. Analysts provide detailed estimates for the next few years, and beyond that Simply Wall St extends the trend using gradually slowing growth assumptions, which helps avoid unrealistically high long term growth rates.

When those projected cash flows are discounted back to today, the DCF model arrives at an estimated intrinsic value of about $689.47 per share, which is roughly 13.1% above the recent share price of $598.87. On this basis, Spotify appears modestly undervalued, though not a deep bargain.

Result: UNDERVALUED

Our Discounted Cash Flow (DCF) analysis suggests Spotify Technology is undervalued by 13.1%. Track this in your watchlist or portfolio, or discover 904 more undervalued stocks based on cash flows.

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for Spotify Technology.

Approach 2: Spotify Technology Price vs Earnings

For profitable companies like Spotify, the price to earnings ratio is a useful yardstick because it links what investors pay today to the profits the business is actually generating. The higher the expected growth and the lower the perceived risk, the more investors are usually willing to pay in the form of a higher PE multiple.

Spotify currently trades on a PE of about 74.81x, which is well above the broader Entertainment industry average of around 20.83x and slightly below its peer group average of roughly 77.24x. That indicates investors are already baking in strong growth and a relatively favorable outlook compared to the typical media stock.

Simply Wall St’s Fair Ratio framework goes a step further by estimating what Spotify’s PE multiple should be, given its specific earnings growth profile, profit margins, size, industry and risk factors. For Spotify, that Fair Ratio is around 34.99x, which is materially lower than the current 74.81x. On this basis the shares appear expensive relative to the level of growth and risk currently implied.

Result: OVERVALUED

PE ratios tell one story, but what if the real opportunity lies elsewhere? Discover 1447 companies where insiders are betting big on explosive growth.

Upgrade Your Decision Making: Choose your Spotify Technology Narrative

Earlier we mentioned that there is an even better way to understand valuation, so let us introduce you to Narratives. With Narratives, you describe your view of a company in plain language and link that story to specific forecasts for future revenue, earnings, margins and ultimately a fair value estimate.

A Narrative connects three pieces together: the business story you believe, the numbers that flow from that story and a fair value that lets you compare your expectations to the current share price.

On Simply Wall St, Narratives live in the Community page and are designed to be easy to use. You can quickly plug in your assumptions, see the resulting forecasts and fair value, and decide whether the stock looks like a buy, a hold or a sell based on the gap between Fair Value and Price.

Because Narratives are updated dynamically when new information such as earnings results, product announcements or macro news arrives, they help you keep your thesis current instead of relying on a static one off model.

For Spotify Technology, one investor might build a Narrative that supports a fair value around $485 if they are cautious on margins and competition. Another investor might see a path closer to $910 by assuming stronger user growth, pricing power and operating leverage. Both investors can transparently see how their story translates into numbers.

Do you think there's more to the story for Spotify Technology? Head over to our Community to see what others are saying!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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