Spotify Technology S.A. - This is a top pick in this market, but it comes at a premium
Time to revisit my Spotify thesis after the company reported its Q1 results recently! Without a doubt, Spotify is a top pick amid heightened uncertainty, but should you be willing to pay the premium?
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Introduction
On April 29, Spotify Technology, the music streaming behemoth with a 32% global market share, which is almost double that of its closest Western peer, reported its first-quarter results, which were once again strong, even as Spotify fell short of expectations. In response to the miss, shares dropped in the following trading session, although they have since recovered nicely, driven by strong broader market sentiment.
Meanwhile, it’s not hard to argue that Spotify delivered an excellent quarter, anyway. The company continues to deliver robust subscriber and revenue growth, driven by high engagement, strong retention, and its effective freemium model. Meanwhile, cash flows continue to improve, and margins expand.
The company is executing really well on all fronts, showing strong underlying numbers that continue to show long-term promise. Back in January, I already laid out my bullish Spotify thesis in a deep dive (found below), and not too much has changed since, with the company’s numbers still trending in the right direction.
However, although I already deemed shares overvalued in January, these have acted in line with the results. Shares are up 19% since my January post, while the S&P 500 lost 7% of its value. Why? Well, apart from Spotify delivering great numbers, the company has been relatively isolated from broader market pressures, with it not hit by any of this tariff nonsense, and the company being deemed quite recession-resistant, making it an extremely compelling pick amid current uncertainty.
Simply put, the company provides a low-cost form of entertainment that people are less likely to cancel during tough economic times. When consumers tighten their budgets, they usually cut big discretionary expenses first—things like vacations, luxury goods, or expensive subscriptions. In contrast, Spotify’s monthly fee is relatively inexpensive, making it one of the last subscriptions many users would consider giving up.
Besides, regardless of the state of the economy or consumer, music is essentially a necessity. In the words of UMG management, “Music is fundamental to the human experience.”
Yet, does this justify Spotify’s even higher premium?
Let’s review the Q1 results before getting to the outlook and valuation!
