Spotify (SPOT): Assessing Valuation Following Expanded Sony Partnership and Direct Licensing Deal

Spotify Technology (NYSE:SPOT) just unveiled a sweeping multiyear expansion of its partnership with Sony Music Group, a move that could reshape how artists and listeners connect on the platform. This new agreement not only reiterates ties but also introduces enhanced audio and visual formats, along with a direct licensing arrangement with Sony Music Publishing in the US. This means songwriters may see more direct rewards from streaming growth. For investors, this kind of collaboration suggests fresh momentum in Spotify’s push for innovation.

The market seems to have taken notice. Over the past year, Spotify’s shares have nearly doubled, with year-to-date gains topping 60%. While the past three months saw a minor dip, the recent deal appears to have rekindled enthusiasm around Spotify’s growth story. In addition to this Sony deal, Spotify’s revenue and net income growth rates show strong operational progress, supporting the company’s status as a market leader in streaming innovation.

With the stock still far above last year’s levels and new platform features in the pipeline, some investors may be considering whether Spotify Technology is positioned for further gains, or if the market has already incorporated all of this anticipated future growth.

Most Popular Narrative: 4.5% Overvalued

According to MichaelP’s widely followed narrative, Spotify appears slightly overvalued compared to his view of fair value, with the current price running just ahead of projected fundamentals. The focus here is on long-term cash flow growth and operational leverage, despite a few recent execution hiccups.

"Spotify is transitioning from a high-growth platform to a highly cash-generative business with meaningful operating leverage. The company continues to grow its user base faster than expected, expand margins, and generate significant cash, all while monetization initiatives (like audiobooks and ads) still have room to run."

Is Spotify about to unlock a new era of profitability? This narrative points to a crucial but not obvious ingredient driving its lofty valuation. The call is bold, the data behind it surprising. Want to see the full list of quantitative levers, including projections that push Spotify’s estimated worth into rarefied territory? The numbers at the core of this forecast might just change how you see the company’s future potential.

Result: Fair Value of $703 (OVERVALUED)

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

However, risks remain. Intensifying competition or slower adoption of new features could quickly challenge Spotify’s optimistic long-term growth narrative.

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

Another View: What Does Our DCF Model Say?

Taking a different approach, our SWS DCF model evaluates Spotify’s future cash flows. This perspective also finds the stock overvalued, reinforcing the earlier view from a fundamentals-driven angle. Could future growth shift the equation?

Look into how the SWS DCF model arrives at its fair value.

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out Spotify Technology for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover undervalued stocks based on their cash flows. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Build Your Own Spotify Technology Narrative

If you see the numbers differently or want to dig into the details for yourself, it's easy to build and share your own perspective. Do it your way.

A good starting point is our analysis highlighting 2 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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