Shares of music streaming specialist Spotify Technology (SPOT -0.43%) have been on fire, and the stock is up 52% this year. However, some might argue that after this strong run, it's best to stay away from it.
The bears might point out that the longtime CEO and co-founder, Daniel Ek, will soon be stepping down from his role. Ek has led Spotify since its inception in 2006, earning strong returns along the way. Now, many investors and analysts wonder whether the company can perform nearly as well under new leadership.
The detractors would also highlight the company's valuation. The stock is trading at 52 times forward earnings, more than twice the average of 21.6 for the communication services industry. Are the bears right? Let's find out whether there is more upside left for Spotify.
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Why Spotify is performing well
Everyone loves music, and most people now own a smartphone. Spotify enables users to take their favorite songs and albums with them, wherever they go. The company's streaming platform is the leader in this niche, even beating out those of huge tech companies like Apple and Amazon in market share.
Any corporation that can survive and thrive amid competition from these two juggernauts in any domain is probably doing something right. Spotify's success comes from several factors.
The company has been a leader in this niche for a long time and has built a strong brand name. Some might say it's the music streaming equivalent of Netflix. Brand power matters; companies with well-known and powerful names can attract consumers with minimal advertising compared with competitors.
Spotify also benefits from a strong network effect. A growing number of subscribers attracts artists looking for publicity and record labels willing to sign licensing deals with the company. All these factors have generally led to strong financial results and a deepening ecosystem.
In the second quarter, revenue increased by 10% year over year to 4.2 billion euros ($4.9 billion). Monthly active users (MAUs) on the platform reached 696 million, an 11% increase compared to the same period last year. Premium subscribers reached 276 million, 12% higher than in the prior-year quarter.
Spotify reported a net loss per share of $0.49 for the period, significantly lower than the $1.56 earnings per share it posted in the prior-year quarter. That's also been one of the bears' arguments: It still isn't consistently profitable. However, the company has made significant progress in that department in recent years and generated a net profit over the first half of 2025.
Spotify also recorded free cash flow of $821 million in the second quarter, up 43% year over year.
Potential growth drivers
Several factors should allow Spotify to continue generating strong returns. First, the company could gain even more users, given its long history. Ek set a goal to hit 1 billion MAUs before 2030. That's reasonable considering it is already closing in on 700 million.
Second, converting ad-supported users into premium subscribers should also help boost sales. Less than half of Spotify's MAUs pay a fee for its premium services, but as the total number of users on the platform grows, both ad-supported and paying subscribers should move northbound.
Third, the company is increasing engagement on its platform thanks to the use of artificial intelligence (AI). Some of its initiatives are seeing tremendous success. For instance, the company's Spotify DJ, which it launched in 2023, helps users discover new music they might like through AI-powered algorithms.
It has recently introduced a voice command feature to its AI music assistant, enabling users to interact with it directly in plain English. Management said that Spotify DJ has been a hit and has helped drive greater engagement on the platform. That can lead to higher demand for ads and higher ad revenue.
Lastly, Spotify is also looking to improve its ad business through automated ads. All these efforts should ultimately translate into increased revenue and earnings, enabling the company to maintain strong financial results.
Is Spotify stock a buy?
Even though the company looks expensive by traditional valuation metrics and its longtime CEO is stepping down, the shares remain attractive, in my view. The stock has the broadest reach in terms of users within its industry and significant potential to grow even further, while improving efficiency through AI and other initiatives.
The new co-CEOs, Gustav Söderström and Alex Norström, who have been with the company for about 16 years and 14 years, respectively, are inheriting an excellent well-run business they know inside out. So, despite recent developments, Spotify can still deliver strong returns to investors who hold on to its shares for the next five years.
