It's impossible to know the future. However, by closely examining a company's fundamentals, its business model, and its management team, it is possible to make an educated prediction about how a stock might perform.
With that in mind, let's take a closer look at Spotify Technology (SPOT +0.67%) and try to figure out where the stock might be five years from now.
Image source: Getty Images.
How Spotify stock performed over the last five years
To start, let's get a handle on how Spotify stock has performed. Since August 2020, five years ago, the company's stock has increased by 192%. That works out to a compound annual growth rate (CAGR) of 24%. It also compares favorably to the benchmark index, the S&P 500, which has increased by 91% over the same period, with a CAGR of 14%.
NYSE: SPOT
Key Data Points
There are two big reasons for this excellent performance.
First, Spotify is a major beneficiary of the streaming revolution. Thanks to the ubiquitous nature of smartphones and the nearly global availability of broadband internet, people around the world have switched to streaming to hear their favorite music. Consequently, the company now boasts nearly 700 million daily average users (DAUs) and more than 276 million subscribers.
The second reason Spotify enjoyed stock market success is due to sound management and cost control. Up until 2024, Spotify struggled to turn a profit. However, after several rounds of cost cuts and price hikes, Spotify generated over $860 million in net income over the last 12 months. That's despite reporting a small loss in its most recent quarter, which CEO Daniel Ek blamed on "an execution challenge."
How Spotify is executing right now
Clearly, one unprofitable quarter isn't that meaningful when trying to evaluate how a company and its stock will perform over a period of five years. That said, Spotify's recent earnings miss raises questions about how profitable the company will be going forward.
However, this is where trust in management comes into play. Ek has shown the ability to make tough decisions and to rein in spending before. He's made cuts to the company's podcast division every year since 2023, trimming back a consistently unprofitable niche for the company. At the same time, Spotify increased subscription prices while still growing its overall subscriber base.
While these trends could end, I feel confident that Ek will continue to tighten the belt when and where necessary. That should result in Spotify returning to consistent profitability soon -- and remaining profitable thereafter.
Where Spotify stock could be in five years
So, if Spotify can continue to grow its key metrics at a similar rate, where would that leave its stock five years from now?
I believe that Spotify can maintain its current growth for at least five years. Therefore, let's take its last five years as a basic guide.
The company's stock generated a CAGR of 24% over those five years, and, to be conservative, let's assume a CAGR of 18% for the next five years.
If that were to occur, Spotify stock would increase by about 129% over the next five years, bringing its price (assuming no stock splits) to roughly $1,670.
Now, obviously, this is a prediction, and Spotify might not live up to it. There are risks, such as higher costs, slower growth, greater competition, or regulation, all of which could negatively affect Spotify and its stock price.
However, right now, I remain bullish on Spotify, and I believe that investors seeking a solid growth stock would be wise to consider it.
