Spotify initiation of coverage: The king of audio streaming

We initiate coverage of Spotify with a Reduce recommendation and a target price of USD 470. Spotify’s impressive transformation into a profitable business with strong free cash flow generation, coupled with sustained high growth in its user base, underscores the platform’s strength and solid fundamentals. However, we believe the current valuation already reflects these achievements, warranting a more cautious stance at this point.

From music distruptor to a leading audio streaming platform

Since its 2008 debut, Spotify has revolutionized the music industry by replacing the transaction-based model with an access-first streaming approach. With its freemium model, Spotify quickly gained ground and rapidly scaled its user base. Over the years, the company has developed strong personalization capabilities, but also expanded beyond music streaming to podcasts and audiobooks, while tapping into more engaging video content. Spotify aims to add more verticals in the years to come to enhance its value proposition further while also expanding in new markets to boost revenue growth. Spotify is currently the leading audio streaming platform globally, with over 30% of the music streaming subscriber market, and more than 640 million users across 180+ markets.

Shift from growth-at-all-costs to profitability and record free cash flow

For much of its history, Spotify was praised for its user-friendly platform but questioned as a business due to low gross margins and profitability challenges. However, in 2023, the company effectively transitioned from a focus on growth-at-all-costs to prioritizing profitability. The company executed significant cost-cutting initiatives and increased subscription prices across key markets, while remaining focused on enhancing its value proposition for users. These initiatives have not only propelled Spotify to record levels of profitability and free cash flow, but also eased investor concerns about the business and demonstrated its ability to balance growth with profitability.

On the path to 1 billion users by 2030

Spotify’s 2022 goal of reaching 1 billion users by 2030 appears within reach, driven by its consistent user growth, underlying growth of global paying subscribers and ongoing platform improvements. While mature markets such as the U.S. and Europe face increased saturation, Spotify is leveraging localized content and flexible pricing to capture market share in the faster-growing emerging markets, where digital streaming adoption is on the rise. This, coupled with investments in personalization, vertical expansion, and new subscription plans, are expected to further increase Spotify’s user monetization potential and support high revenue growth. However, Spotify’s long-term outlook is not without risks. Potential strains in its relationships with the music industry, competitive pricing pressure, and challenges in expanding into non-music verticals could impact the growth trajectory.

Risk/reward depleted following stock rally

Over the past two years, Spotify's stock has appreciated significantly, reflecting investors’ heightening confidence in its growth and profitability initiatives. Based on our 2025e estimates, Spotify is trading at forward EV/FCFF and EV/EBIT multiples of 29x and 42x, respectively, which we believe to be on the high side. Our DCF model indicates a value per share of USD 468, assuming sustained double-digit growth in the foreseeable future with improved margins. While long-term drivers such as expanding its user base and enhancing margins remain intact, we are on the lookout for a more attractive risk/reward.