The S&P 500 is in a raging bull market proper now. It returned 23% over the previous yr, however that pales compared to the whopping 180% acquire in Spotify Know-how (NYSE: SPOT) inventory.
Spotify operates the world’s largest music streaming platform, and buyers seem more than happy with the corporate’s skill to proceed rising its subscriber base, whereas fastidiously managing prices to ship surging earnings on the identical time.
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Spotify inventory is beginning to look expensive following its unimaginable positive aspects, so is it too late for buyers to purchase?
Picture supply: Getty Photos.
Greater than only a music platform
Spotify ended 2024 with a file 675 million month-to-month lively customers. It breaks prospects into two classes: 425 million free customers who’re monetized via promoting, and 263 million customers who pay a month-to-month subscription for Spotify’s premium, ad-free service. The premium subscriber determine was 3 million larger than administration’s forecast, which is strictly what buyers need to see as a result of premium customers symbolize 87% of the corporate’s complete income.
Spotify is investing closely to proceed attracting customers. First, it is betting massive on applied sciences like artificial intelligence (AI) to enhance the consumer expertise. Over the previous yr, it launched options like AI Playlist, which permits customers to enter a text-based immediate referencing a colour, a spot, and even an emoji, and it’ll immediately generate a listing of songs to match.
Second, Spotify continues to increase its content material catalog past music. It is already one of many world’s largest podcast platforms, however it’s providing creators extra monetary incentives to make video podcasts to enhance the audio expertise, as a way to enhance engagement. As of the top of 2024, greater than 270 million Spotify customers streamed at the very least one video podcast, and its library now comprises over 330,000 titles (and rising).
Furthermore, Spotify can also be now the second-biggest supplier of audiobooks behind Amazon‘s Audible. Premium subscribers can pay attention to fifteen hours price of audiobooks per thirty days, however they’ll additionally pay an extra payment to unlock extra time, which creates a brand new income stream for the corporate. There are greater than 375,000 audiobook titles out there, and that quantity will proceed rising to entice customers to spend extra time listening.
Spotify posted its first annual revenue in 2024
Spotify generated $16.3 billion in complete revenue throughout 2024. It was an 18% year-over-year enhance, which marked an acceleration from the 13% development the corporate delivered in 2023.
That is much more spectacular than it sounds as a result of Spotify slashed its operating expenses by round 12% throughout 2024, which included reductions in all the pieces from research and development to advertising and marketing. Standard knowledge suggests that might harm any firm’s skill to draw new prospects and generate further income, however Spotify’s investments in know-how and its rising content material catalog have spurred vital natural development.
Accelerating top-line development mixed with steep price cuts allowed more cash to circulation to the underside line as revenue. Consequently, Spotify delivered $1.2 billion in net income throughout 2024, which was a giant swing from the $554 million internet loss it generated in 2023. It was additionally the corporate’s first worthwhile yr.
Spotify inventory is dear by each conventional metric
Now that Spotify has a full-year revenue beneath its belt, buyers can begin valuing its inventory utilizing the price-to-earnings (P/E) ratio. Primarily based on the corporate’s earnings per share of $5.74 in 2024, the inventory trades at a P/E ratio of 109 as of this writing.
That’s extraordinarily excessive — by comparability, the S&P 500 index trades at a P/E ratio of 25.5. Even high-flying AI inventory Nvidia trades at a lesser P/E ratio of 49.1.
Nevertheless, Wall Avenue’s consensus forecast (offered by Yahoo!) suggests Spotify’s earnings per share might soar to $10.82 throughout 2025, inserting its inventory at a barely cheaper (however not essentially low cost) forward P/E ratio of 57.2.
The inventory may also be valued utilizing the price-to-sales (P/S) ratio, which divides an organization’s market capitalization by its annual income. Spotify’s P/S ratio simply hit a brand new all-time excessive of seven.8, which is double its long-term common of three.9:
SPOT PS Ratio knowledge by YCharts
So Spotify inventory is not low cost, however is it a purchase? Again in 2022, CEO Daniel Ek issued a long-term forecast suggesting Spotify’s annual income might hit $100 billion by 2032. A yr later, he predicted the platform’s month-to-month lively consumer base might high 1 billion by 2030. If his income steering involves fruition, Spotify inventory appears like a cut price proper now for any investor who can maintain onto it for the subsequent eight years (or extra).
Nevertheless, buyers ought to at all times be cautious about long-term forecasts of that nature. Something can occur between now and 2032 — a brand new know-how might change streaming, or the leisure business might change dramatically due to AI-generated content material.
Consequently, it may be safer for buyers to attend for a pullback in Spotify inventory earlier than shopping for in.
Must you make investments $1,000 in Spotify Know-how proper now?
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John Mackey, former CEO of Complete Meals Market, an Amazon subsidiary, is a member of The Motley Idiot’s board of administrators. Anthony Di Pizio has no place in any of the shares talked about. The Motley Idiot has positions in and recommends Amazon, Nvidia, and Spotify Know-how. The Motley Idiot has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the writer and don’t essentially mirror these of Nasdaq, Inc.
