Spotify Technology S.A. SPOT shares have skyrocketed 133.1% in a year, outperforming the 52.4% rally of its industry and the 18.2% rise in the Zacks S&P 500 Composite.

One Year Price Performance

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The stock is trading above its 50-day moving average, indicating bullish sentiment among investors.

Given the rise in SPOT’s shares, investors may feel inclined to ride the rally. However, the crucial question remains: Is this the right time to invest in Spotify? Let us evaluate.

Content Quality and Higher MAU are SPOT’s Growth Drivers

Content quality is one of the principal factors in determining price, enabling the company to deliver prices for value to the users. This strategy binds the users in for the long term and monetizes the user base via further pricing power. Apart from a world-leading catalog of music, Spotify has a large and expanding 67 million video podcast inventory and 350,000 audiobooks in 10 markets. This feat allows the company to have significant command over pricing its users and ways to monetize the users.

A high-quality content inventory significantly boosts monthly active users (MAU), driving its revenues. In addition to that, the annual Wrapped campaign is a major driver behind MAU and subscriber growth. In the fourth quarter of 2024, MAU increased by 35 million to 675 million in total, surpassing the management’s previously provided guidance by 10 million. Furthermore, premium revenues grew 19% year over year, driven by pricing power on the new user growth, suggesting that a bulk of new active user growth is high-quality paying users that have significant average revenue per user (ARPU) upside once the premium features begin to get monetized.

Spotify’s Strong Top & Bottom-Line Prospects

The Zacks Consensus Estimate for SPOT’s 2025 and 2026 revenues is pegged at $18.8 billion and 21.6 billion, implying 11.1% and 14.8.% year-over-year growth, respectively. The consensus estimate for Spotify’s 2025 and 2026 earnings per share stands at $10.3 and $13.1, suggesting 73.1% and 27.2% year-over-year increases, respectively.

SPOT’s Liquidity Position Lags Industry

In the fourth quarter of 2024, Spotify’s current ratio of 1.88 underperformed the industry average of 2.21. However, the metric has increased by 9.9% from the preceding quarter, and a current ratio of more than 1 indicates efficient short-term debt coverage capabilities.

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Spotify Faces Fierce Competition

The company faces intense competition from major players like Apple AAPL Music, Alphabet’s GOOGL YouTube and Amazon AMZN Music. These companies can use their financial strength to trim streaming prices and reduce or limit content availability, thereby deteriorating Spotify’s monetization strategy and hurting the stock price. The company is exposed to royalty cost hikes due to its strong reliance on third-party content licenses. This could impact margins as SPOT expands its content offerings to include audiobooks and video.

Spotify Stock Looks Overvalued

SPOT’s outstanding performance in 2024 has led to a surge in its stock price, leading to elevated valuations. It is priced at 54.8 times forward 12-month earnings per share, which is higher than the industry’s average of 41.5 times. While the optimism about its growth prospects underpins this premium, maintaining such high multiples may prove challenging. Any deficit in growth expectations could result in a valuation correction.

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SPOT: Wait for the Right Entry Point

The massive rise in SPOT’s shares can be attributed to strong top-line growth and improved pricing power. Inclination towards maintaining a high content quality and a surge in MAUs paves the way for the company’s long-term success. A robust liquidity position and optimistic top and bottom-line outlook are added advantages.

Meanwhile, the company faces significant headwinds in the form of heightened competition, reliance on third-party licenses and inflated valuation. Trading at a forward P/E of 54.8X, above the industry average, might hinder the near-term growth.

Investors are recommended to adopt a “Hold” strategy, awaiting vivid signs of sustained growth and a potential pullback in its valuation before increasing exposure.

Spotify carries a Zacks Rank #3 (Hold) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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