Shares of Spotify Technology (SPOT 1.51%) are up about 140% over the last 12 months and more than 540% since the start of 2023. The company is the world’s largest music streaming provider, with over 250 million subscribers.
Yet, the question investors want to know is whether this streaming giant’s stock is primed to advance further or take a breather. Let’s pull back the curtain and try to determine where Spotify stock is headed over the next year.
Image source: Getty Images.
What is behind Spotify’s recent surge?
To understand where Spotify might be headed, let’s first see where it’s been.
In short, the stock has been on fire for more than two years. Spotify shares retreated by more than 80% in 2021 and 2022 as the company’s losses piled up and investors soured on growth stocks in general.
However, in early 2023, Spotify CEO Daniel Ek embarked on a series of cost-cutting measures that would lead to the stock’s turnaround. All in all, Ek cut about 17% of the company’s workforce in 2023, which refocused the company on its core mission of music streaming and brought its costs under control.
After hitting a multiyear low of -7.8% in mid-2023, Spotify’s operating margin — the percentage of operating income (or losses) divided by revenue — has increased to 11.4%. In turn, shares have soared and are once again hitting all-time highs.
Where is Spotify headed?
While Spotify’s earnings turnaround is an important piece of the puzzle, it’s not everything. Growth, and specifically revenue growth, remains critical to Spotify’s investment thesis.
And on that front, the future continues to look bright.
Bear in mind, over the last five years, Spotify has averaged quarterly revenue growth of nearly 18%. And over the last five quarters, revenue growth has exceeded that 18% average.
SPOT Operating Revenue (Quarterly YoY Growth) data by YCharts.
That’s tremendous growth, particularly for a company of Spotify’s size. As of this writing, the company boasts a market cap of $103 billion, making it one of Sweden’s largest companies and one of the largest public companies in the European Union.
The fuel for that impressive growth is twofold.
First, the bulk of Spotify’s revenue comes from subscriptions. About 88% of the company’s revenue is derived from its premium subscribers who generally pay between $6 and $20 per month.
In addition to subscriptions, the company also generates revenue from ads. More importantly, however, Spotify relies on increasing its subscriber count by converting ad-supported listeners into subscribers.
In other words, user growth is a leading indicator. As the number of ad-supported monthly active users (MAUs) increases, Spotify anticipates that it will convert those users into paid subscribers at a later date. Consequently, steady user growth in one quarter translates to robust revenue growth in another.
What’s great news for Spotify investors is that this pipeline of user growth leading to revenue growth remains rock solid. As of its most recent quarter (the three months ending on Sept. 30, 2024), Spotify reported ad-supported MAUs increased by 11%; premium subscribers increased by 12%.
Where will Spotify be in one year, and is its stock a buy now?
To close, I still view Spotify as a company with plenty of room to grow. As noted earlier, its business model delivers amazing revenue growth, and by keeping its costs in check, the company has racked up outstanding profits.
According to data compiled by Yahoo! Finance, analysts expect the company to grow sales by 15% in 2025, while earnings are predicted to rise by nearly 60%.
I believe those figures are more than achievable for Spotify, and I expect the company’s stock to outperform the market over the next year.
Jake Lerch has positions in Spotify Technology. The Motley Fool has positions in and recommends Spotify Technology. The Motley Fool has a disclosure policy.
