The S&P 500 (^GSPC -0.03%) was down by as much as 15% earlier this year on the back of simmering global trade tensions, which were ignited by President Trump's "Liberation Day" tariffs in April. The index has since recovered its losses, and it's now sitting on a modest year-to-date gain of 2%.
But investors who bought Spotify (SPOT -1.50%) stock at the start of the year have earned an eye-popping 57% return as of this writing (June 18). In fact, the stock never dipped into the red at all, despite the turmoil in the broader market.
Shares of the music streaming giant are now trading at a record high, and while the company's future looks extremely bright, there is one glaring reason investors should be cautious from here.
Image source: Getty Images.
The undisputed leader in music streaming
According to Statista, Spotify has a 31.7% global market share in the music streaming industry. It's a long way ahead of Tencent Music in second place, with 14.4% of the market.
Most music streaming platforms feature very similar content catalogs, so they have to compete with one another on price, technology, and by offering other content formats. That's why Spotify invested heavily to become one of the world's top podcast platforms. Plus, during the first quarter of 2025 (ended March 31), the company said users spent 44% more time watching video content compared to the year-ago period, so it introduced a new compensation model to encourage creators to make video versions of their podcasts to capitalize on that engagement. This new system paid out over $100 million during the first quarter alone, which could result in a flood of new content from creators who want to earn more money.
Spotify is also investing heavily in artificial intelligence (AI) to deliver the best user experience from a technological perspective. AI is a big part of the platform's recommendation engine, because it quickly learns what each user likes and feeds them more of it. But Spotify has also launched a series of user-facing features powered by AI like AI Playlist, which can generate a list of songs based on a simple prompt from the user, whether it be a movie, feeling, animal, or even a color.
These AI features are designed to keep users engaged so they spend more time on the platform, which increases the chances Spotify becomes something they can't live without.
Strong revenue growth and soaring earnings
At the end of the first quarter of 2025, Spotify had 268 million paying subscribers, and 423 million free users monetized through advertising. The paying subscriber base is growing slightly faster, which is a big positive because it accounts for 90% of the company's revenue.
According to Wall Street's consensus estimate (provided by Yahoo! Finance), Spotify could generate a record $20.5 billion in revenue during 2025, which would be a 13.7% increase from the prior year. Analysts then expect revenue to come in at $23.7 billion in 2026, representing an accelerated growth rate of 15.7%.
But the real growth story is on the bottom line, because Spotify is carefully managing its costs to drive profitability. The company's total operating expenses fell by 2% during the first quarter, which helped send its free cash flow soaring by a whopping 158% year over year to $615 million.
Wall Street thinks Spotify will deliver $10.33 in earnings per share (EPS) in 2025, which would be a 63% jump from last year. Analysts will then look for $14.88 in EPS in 2026, representing a further 44% growth.
The big reason investors should be cautious
I've painted a very positive picture of Spotify so far, but investors need to carefully consider its valuation before buying the stock. It's trading at a price-to-sales (P/S) ratio of 8.6, which is uncharted territory, because it's the most expensive level since the stock went public in 2018:
SPOT PS Ratio data by YCharts
Plus, based on Spotify's trailing-12-month EPS, its stock is trading at a hefty price-to-earnings (P/E) ratio of 119. In other words, it's an eye-popping five times more expensive than the S&P 500 index, which trades at a P/E ratio of 23.7.
Even if we value Spotify stock using Wall Street's forecast EPS for 2025 and 2026, the stock is still trading at forward P/E ratios of 69 and 48 for those years, respectively. In other words, if you buy Spotify stock today and the company's financial results come in exactly as Wall Street expects, it will still be twice as expensive as the S&P 500 in 18 months from now. That doesn't leave much room for upside.
SPOT PE Ratio data by YCharts
Simply put, Spotify stock just doesn't seem like a great value for investors who want to see gains in the next couple of years. But the picture might look a little different for investors with a longer-term horizon, because CEO Daniel Ek previously issued a forecast suggesting the company could achieve $100 billion in annual revenue by 2032.
That would be a fivefold increase from where Spotify's 2025 revenue is expected to come in, so its stock actually looks cheap right now from that perspective. However, several things can change over the next seven or eight years -- new competitors might emerge, and technologies like AI could change the way we consume content entirely. As a result, buying Spotify stock at the current level still takes some resolve.
