With Spotify Stock Price Ahead of Growth, Here's How to Add
Spotify is enjoying strong growth behind a great business model, and here's how interest investors can buy in.
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In my article called "Stocks That Need Love," published on November 2, 2024, I highlighted Spotify SPOT as a company that was underpriced and good for investment.
Since then, it has surged over 62%, so I wanted to provide an update on where I see Spotify going from here. As a sidebar, here is the performance of the stocks I mentioned in the article compared to the market:
Now, back to Spotify…
Spotify Is Growing Subscribers for Good Reason
The company recently announced strong Q4 earnings and has made significant improvements over the past two years, including the addition of video and audiobooks. Premium subscription growth has been strong, and the business continues to improve in many ways… and for good reason! Users love the product, artists are building their monetization and are becoming more loyal, and so are new dynamic content creators making audio and video podcasts.
A Tollbooth Company Is Born
A tollbooth business controls access to something essential — whether a product, service or platform — and charges people to use it. It’s like owning the only bridge in town and collecting tolls. With limited alternatives, customers have no choice but to pay, creating a high-margin, recurring revenue model.
Spotify is moving in this direction. Artists, podcasters and audiobook creators need it to reach their audience, while users pay for a seamless experience with premium features. By controlling content distribution and monetization, Spotify is becoming the essential middleman, collecting fees from both sides and making itself indispensable.
The CEO has called 2025 a year of accelerated execution, with a focus on music and video. Spotify’s artist-centric loyalty program strengthens creator relationships, and recent deals with Warner Music Group and Podium Entertainment expand its content library. It’s no longer just a streaming service — it’s becoming the tollbooth for the music entertainment industry.
In the chart below you can see the revenue rising at a faster slope than cost of content and the operating expenses. This is an excellent sign for the health of the company.
Transforming the Music Industry and Podcasting, Video, Even education
Looking at Spotify’s evolution, its first iteration solved the piracy problem by introducing a legal, subscription-based streaming model. The company then expanded with offerings like family plans and student discounts, which have been wildly successful. Now, it is focusing on delivering tailored experiences for subgroups and super fans.
I See Continued Subscriber Growth, More User Loyalty
In an inflationary environment, competitors like Amazon AMZN and Apple APPL have raised prices, and so has Spotify — but unlike others, Spotify has earned its price increases by adding features like AI-powered playlists, jam sessions, audiobooks, video podcasts and virtually the entire world’s music catalog. That’s an incredible achievement.
The company is now exploring TV integration, though it’s still early in that process. Gross margins are expected to improve further as they scale. While there is some seasonality in the business, I like that it operates on a largely consistent subscription-based model. Creators are also increasingly favoring Spotify. For example, video podcasters are adopting their partner program, and the combination of music, podcasts and video content — including audiobooks — is gaining traction.
Higher Profits Are on the Horizon
Spotify had their first profitable year after years of building and investing in the platform. Engagement, the key driver of revenue and subscriber retention, has been rising. The company is also expanding into educational content, which presents another long-term growth opportunity. While ad revenue hasn’t grown as quickly as expected, premium subscribers has bloomed. Spotify has built the necessary infrastructure to position itself for stronger ad growth in the future.
Podcasts have reached breakeven and could soon contribute to profitability. Spotify is also leveraging AI extensively to boost productivity, improve programming and enhance user recommendations, all while lowering costs.
Spotify Stock Price Ahead of Growth Pattern
That said, the stock is now trading at seven-times sales and has already gained 62% since we bought it. While the business fundamentals remain strong, the valuation seems a bit stretched. Given that, I’d consider holding here and looking to buy more on pullbacks. Typically, stocks tend to go into a consolidation pattern after a big rise in price. You could see bouts of selling which could offer opportunities to pick up the stock.
I do not intend on selling stock because the business remains in tact and is in fact improving. Profitability is likely to accelerate due to operating leverage and increased subscribers and more content that attracts new users.
