Morningstar has issued an equity research report on Spotify Technology SA (NYSE: SPOT), highlighting its strong growth trajectory and increasing profitability while raising concerns over overvaluation. The firm’s fair value estimate for Spotify stands at $450 per share, while the stock’s current price of $535.84 suggests that it is trading at a premium of 19%. Spotify’s impressive subscriber additions, pricing power, and operating leverage make it an industry leader, but its dependency on major record labels poses risks. This report provides a deep dive into Spotify’s business model, financials, and investment outlook, offering insights for investors evaluating their positions in the stock.

Strong Performance and Increasing Profitability

Spotify delivered strong financial results, beating expectations with record-breaking Q4 subscriber additions and robust revenue growth.

Revenue Growth: The company saw a 17% year-over-year increase in revenue, demonstrating sustained momentum in the streaming industry.
Subscriber Expansion: Spotify added 11 million premium subscribers in the last quarter, underscoring its dominance in the global music streaming sector.
Price Increases Driving Revenue: A 5% increase in revenue per subscriber fueled top-line growth, supported by higher pricing tiers and a growing share of premium users.
First Year of Net Profitability: The firm ended its first-ever profitable year, a major milestone given its history of operating losses.
Morningstar analysts argue that while Spotify's financials are improving, the stock price has outpaced its intrinsic value, warranting caution for new investors.

Morningstar’s Fair Value Estimate: Stock Overvalued at Current Levels

Morningstar has adjusted its fair value estimate for Spotify upward from $390 to $450 due to stronger-than-expected margin expansion. However, with the stock trading at $535.84, analysts believe it is overvalued.

Fair Value Estimate: $450 per share
Current Price: $535.84 per share
Overvaluation Premium: 19% above fair value
Price-to-Free Cash Flow (P/FCF) Multiple: 40x 2025 estimates
This premium valuation suggests that investors should be cautious before taking new positions, as much of the future growth potential is already priced into the stock.

Competitive Advantage: A Narrow Moat

Morningstar assigns Spotify a narrow economic moat, meaning it has a competitive advantage but faces industry risks.

Strong Market Position: Spotify remains the largest global music streaming platform, with 700 million monthly active users and over 250 million paying subscribers.
Pricing Power and Subscription Growth: The company has room to increase subscription prices, further driving revenue growth.
Podcast and Audiobook Expansion: Spotify’s investments in podcast content and audiobook subscriptions could enhance long-term profitability.
However, its reliance on major record labels prevents it from achieving a wider moat, as labels maintain pricing power over streaming platforms.

Key Risks and Challenges

Despite its dominance in the music streaming industry, Spotify faces several key risks that could impact its growth trajectory.

1. Dependence on Record Labels
Spotify does not own the majority of its content. Instead, it must pay significant licensing fees to record labels. Currently, 65% of its music-related revenue goes to labels and artists, limiting gross margin expansion.

2. Shrinking Penetration in High-Value Markets
While subscription growth remains strong, future growth is expected to slow in developed markets such as the U.S. and Europe, where penetration is already high. Instead, new subscriber additions will likely come from lower-priced markets, limiting the impact on revenue per user.

3. Increased Competition
Spotify competes with Apple Music, YouTube Music, and Amazon Music, all of which operate within broader ecosystems. These tech giants do not rely solely on streaming for profitability, allowing them to bundle music services with other offerings.

Investment Outlook: Proceed with Caution

Morningstar believes Spotify is an outstanding business, but the current stock price reflects much of its upside potential. Investors should consider the following:

Valuation Risks: At 1.19x price-to-fair value, the stock is overpriced relative to intrinsic value.
Growth Outlook: While subscriber and revenue growth remain strong, developed-market saturation could slow future expansion.
Strategic Opportunities: Podcasting, audiobooks, and advertising present new revenue streams, but profitability depends on continued operating leverage.
Investor Recommendation
Long-term investors should wait for a pullback to around $450 before entering new positions.
Traders could look for short-term opportunities around support and resistance levels.
Cautious investors may prefer diversified exposure through competitors like Apple Inc. or undervalued stocks like Tencent Music.