Spotify Stock Soars 141% in a Year: What Should Investors Do?

Spotify Technology S.A. SPOT shares have skyrocketed 141% in a year, outperforming the 43.3% rally of its industry and the 12.1% rise in the Zacks S&P 500 Composite.

1-Year Price Performance

This explosive growth must certainly be attractive to investors. Let us delve deeper to assess the stock’s current situation and recommend whether investors should buy, hold or fold it.

Spotify’s AI-Laced Innovations Underpin Growth

From AI DJ to AI Playlist, Spotify has led tech advancements on the back of AI. Starting with the launch of AI DJ in 2023, the company has experienced higher customer engagement.

SPOT observed 16.9% growth in monthly active users (MAU) in the fourth quarter of 2023 from the March quarter of that year. The metric witnessed a 10% rise by the end of the fourth quarter of 2024. Spotify added 3 million in MAU during the first quarter of 2025. This growth in MAU is a testament to the company’s ability to benefit from AI-led innovations.

Moving on to another AI advancement, we find that Spotify’s AI Playlist feature is gaining traction, allowing premium users to create playlists from prompts. A hint of success can be felt from this product's expansion into more than 40 new markets in April 2025. A material improvement has been observed in terms of average year-over-year revenue per user growth of 4% in the recently reported quarter.

More recently, Spotify has disclosed that it is now accepting audiobooks from ElevenLabs. Authors can now utilize this AI software company to narrate audiobooks in 29 languages and distribute the content to Spotify. It will expand the authors’ reach, strengthening SPOT’s position in the global audio streaming market.

SPOT’s Strong Top & Bottom-Line Outlook

The Zacks Consensus Estimate for Spotify’s 2025 revenues is pegged at $20.5 billion, suggesting a year-over-year rise of 20.7%. The same is expected to rise 14.2% in 2026. The consensus mark for earnings is pegged at $9.15 per share, indicating a 53.8% year-over-year rally. For 2026, it is anticipated to grow 45.3% year over year.

Spotify Robust Liquidity Position

SPOT’s current ratio in the first quarter of 2025 stood at 1.48 compared with the industry’s average of 2.34. Despite the metric lagging the industry, it has shown promising growth from the year-ago quarter’s 1.42 on the back of higher cash reserves. The company’s ability to cover short-term obligations effectively is reflected in its current ratio, which exceeds 1.

SPOT’s Valuation Concerns, Profitability Lags Industry

Spotify is priced at 62.5X forward 12-month earnings per share, surpassing the industry’s average of 40.15X. The trailing 12-month EV-to-EBITDA ratio indicates overvaluation as well, with it trading at 70.13X, far exceeding the industry’s average of 14.94X.

Investors may not be flattered by Spotify's profitability position when they learn that its return on equity (ROE) stands at 22.5% lower than the industry’s average of 32.5%. Also, the fact that the metric has declined 260 basis points from the preceding quarter raises questions about the company's profitability position in the upcoming quarters.

Spotify Navigates Through a Complex Competitive Terrain

SPOT operates in a fiercely competitive market where tech giants like Apple AAPL and Amazon AMZN dominate. Although Spotify is at the top with 36% of paid audience in the United States as of 2024, Apple Music is just behind with 30.7% and Amazon Music with 23.8% (per Digital Music News). This shows that Spotify is in a constant battle with tech giants, prompting it to invest rapidly to stay ahead, which can affect its ability to balance growth and profitability.

One may be assured that Spotify's strength lies in its superior recommendation algorithms; however, Apple Music’s lossless and spatial audio, and Amazon Music’s Prime Subscription position them well within the audio streaming market, ensuring the battle for ears is intense.

Verdict: Hold on to Your SPOT for Now

Spotify has been incorporating AI in its offerings, thereby enhancing its customer growth narrative. Indulging in partnership with ElevenLabs has created a bedrock for global expansion. The top and bottom-line outlook seems promising. A strong liquidity position captures investors' attention.

However, the stock’s premium valuation should raise red flags, and its profitability, which is lagging industry figures, is concerning. We must not overlook competition, given that the market is dominated by tech giants, affecting Spotify’s growth-profitability balancing act, making it a tightrope walk.

Weighing the pros and cons, we suggest investors remain cautious and retain their positions for now since pursuing the stock at this level is risky. Investors will be at an advantage when an entry point germinates post a pullback and valuation reset.

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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