Spotify (SPOT): Assessing Valuation After Recent Share Price Momentum

Spotify Technology (NYSE:SPOT) has caught the attention of investors following recent trading action, as shares saw an uptick of 1.7% in the latest session. Market participants are looking more closely at its recent moves, taking into account broader trends in streaming demand and profitability.

See our latest analysis for Spotify Technology.

This latest move comes after a standout run for Spotify, with year-to-date share price returns of nearly 50% and an even more impressive total shareholder return of 83% over the past year. The momentum reflects not just revived investor optimism about streaming growth, but also recognition of Spotify’s steps toward better profitability.

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The big question now is whether Spotify's impressive rally leaves room for further upside, or if the market has already factored in all of the company’s future potential. Is there still a buying opportunity, or is growth fully priced in?

Most Popular Narrative: 2.5% Undervalued

According to MichaelP, the most prominent narrative currently sees Spotify’s fair value slightly above its last close price, suggesting room for upside. This view is built upon aggressive expectations for user growth, margin expansion, and cash flow gains in the coming years.

"Spotify reported a gross margin of 31.5% in Q2, up from 27% a year ago and in line with the 32.2% reported in Q4. This suggests Spotify is steadily executing on gross margin expansion, despite currency volatility and content mix shifts."

Read the complete narrative.

Ready for a bold valuation thesis? The narrative’s projection hinges on rapid expansion, stronger profits, and a future earnings multiple that rivals market leaders. Want to see the financial forecasts MichaelP believes justify this high target? Uncover the surprising drivers that fuel their fair value call.

Result: Fair Value of $703 (UNDERVALUED)

Have a read of the narrative in full and understand what's behind the forecasts.

However, there are still risks. Intensified competition or slower ad revenue growth could challenge these optimistic growth and profitability assumptions in the coming years.

Find out about the key risks to this Spotify Technology narrative.

Another View: Considering Sales-Based Ratios

While some investors see upside based on growth and cash flow forecasts, a closer look at the price-to-sales ratio paints a more cautious picture. Spotify trades at 7.3x sales, which is well above both the peer average of 4.3x and the U.S. entertainment industry average of just 1.9x. Even compared to its estimated fair ratio of 4.6x, the market currently prices Spotify at a significant premium. This raises the risk that much of the growth story may already be reflected in the share price, leaving less room for error if momentum slows.

See what the numbers say about this price — find out in our valuation breakdown.

Build Your Own Spotify Technology Narrative

If you’re looking to draw your own conclusions or want to dive deeper into the numbers, you can easily craft your own Spotify Technology story in just a few minutes, your way. Do it your way.

A good starting point is our analysis highlighting 3 key rewards investors are optimistic about regarding Spotify Technology.

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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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