Shares of Spotify (SPOT +0.22%) had a rough day on Tuesday, falling about 14% after the audio streaming company reported its first-quarter results. Despite a quarter that exceeded the company's own guidance on most key metrics, investors zeroed in on a softer-than-expected operating income forecast for the second quarter.
The latest sell-off extends an already painful stretch for shareholders, with shares now trading more than 40% below their 52-week high and down more than 20% this year alone.
Following such a brutal sell-off, is this the buying opportunity in the growth stock that some investors may have been waiting for? Or are shares still too pricey -- even after their massive beating?
Image source: Getty Images.
What went right in Q1
The headline numbers from Spotify's first quarter looked strong.
Total revenue during the period rose 8% year over year to €4.5 billion. But that figure understates the company's true business momentum. On a constant-currency basis, Spotify's sales climbed 14% -- an acceleration from 13% growth in the fourth quarter of 2025. And its revenue from its Premium tier, which is by far the company's largest revenue stream, grew about 15% year over year on a constant-currency basis and was bolstered by a 5.7% increase in average revenue per user.
User growth held up too. The company's monthly active users rose 12% year over year to 761 million in Q1, exceeding management's guidance of 759 million. And Premium subscribers grew 9% year over year to 293 million -- in line with the company's outlook.
But profitability was the most impressive piece.
Spotify's first-quarter gross margin of 33% marked a Q1 record, while operating income soared 40% year over year to €715 million -- some €55 million ahead of management's own guidance. And free cash flow of €824 million was also a Q1 record.
A key driver behind this impressive profitability? Leaner and more efficient operations, management explained.
"We have not increased our headcount, actually we slightly decreased our headcount, but we are spending more compute per employee," said co-CEO Gustav Söderström during Spotify's first-quarter earnings call. "And that is because we're seeing tremendous return in terms of productivity."
Overall, Spotify reminded investors that it is still a growth company.
Why the stock still looks expensive
So why did shares get pummeled?
The answer lies in the outlook. Management guided for Q2 operating income of just €630 million -- a step down from Q1 in absolute terms and well below the roughly €680 million analysts, on average, were reportedly expecting. The big driver: a sharp ramp in spending on artificial intelligence (AI) initiatives and product marketing. In the company's earnings call, chief financial officer Christian Luiga said operating expenses should remain elevated "for the next quarter or two."
Underneath the headline numbers, there are also some softer signals worth noting.
Premium subscriber growth, for instance, has decelerated meaningfully -- moving from 12% year-over-year growth in each of the first three quarters of 2025, to 10% in Q4, and now to just 9% in Q1. And ad-supported revenue, while up 3% year over year on a constant-currency basis in Q1, fell 5% on a reported basis, extending a soft stretch in the company's smaller advertising business.
NYSE: SPOT
Key Data Points
Then there's valuation.
Even after a year-to-date decline of about 24% as of this writing, the stock's price-to-earnings ratio is still about 29. That is hardly a screaming bargain for a company whose subscriber growth is decelerating and whose near-term margin expansion is being delayed by a heavier investment cycle.
Overall, I think Spotify still looks overvalued, even after this year's reset.
Sure, the company's investments in AI could pay off handsomely, deepening engagement and pushing customer lifetime value higher over time, as management hopes they will. But with subscriber growth decelerating and the second-quarter outlook now suggesting elevated spending will continue to weigh on operating income, I'd rather watch from the sidelines and look for a more attractive entry point later this year.
