Spotify (NYSE:SPOT) Achieves First Full Year of Profitability – What’s Next for the Streaming Giant?
Spotify (NYSE:SPOT) has transformed its financial outlook, delivering its first-ever full year of profitability, sending its stock soaring by over 160% in the last 12 months. As of today, SPOT is trading at $495, a sharp rise from its lows last year, with a price target of $770 by 2026 as Wall Street revalues the company based on EPS rather than revenue multiples.
A major factor in this turnaround has been Spotify’s aggressive monetization strategy, shifting from a growth-focused, cash-burning model to one that prioritizes margin expansion, pricing power, and free cash flow (FCF) generation. This shift, combined with an accelerating premium subscriber base, has made SPOT one of the hottest tech stocks of 2025. But with competition from Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN) intensifying, can Spotify maintain its lead in music streaming while boosting profitability?
Premium Subscriber Growth Driving Spotify’s Profitability Boom
Spotify’s biggest growth driver remains its premium subscriber base, which continues to expand at an impressive rate. Premium subscriptions now account for 63% of total revenue, with 263 million paying subscribers—up 11 million quarter-over-quarter and up 19% year-over-year.
Average revenue per user (ARPU) for premium subscribers stands at €5.3, significantly higher than the €4.4 per ad-supported user, reinforcing why Spotify is aggressively pushing its paid subscriptions. Premium subscribers also contribute to a gross margin of 32.2%, a 5.5% improvement year-over-year.
Despite challenges from Apple Music and Amazon Music, Spotify’s unique blend of podcasts, audiobooks, and music continues to set it apart, solidifying its dominance with a 31.7% market share—far ahead of Tencent Music (14.4%) and Apple Music.
Content Costs Declining – The Shift in Power from Labels to Streamers
Spotify has long faced high content costs, with 80% of its revenue historically going to music labels. However, this power dynamic is shifting. Streaming services have become the primary distribution channel for music, allowing Spotify to negotiate better licensing deals.
Projections suggest that content costs will decline from 70% of revenue in 2024 to 66% by 2027, boosting gross margins and overall profitability. If content costs fall to 60% or lower, earnings per share (EPS) could surge by 158% compared to 2024 levels, demonstrating how Spotify’s financial model is fundamentally changing.
Free Cash Flow Explodes – What Does This Mean for Shareholders?
Spotify’s free cash flow (FCF) has tripled over the last year, reaching $2.2 billion in 2024, with expectations to hit $3 billion in 2025. This marks a turning point, as Spotify now has the ability to return capital to shareholders through share buybacks and dividends—something previously unthinkable for the company.
With a rapidly improving balance sheet and operating cash flow surging 753% year-over-year, Spotify’s valuation is shifting from a revenue-based multiple to EPS-based pricing, signaling long-term value appreciation.
Advertising Revenue – The One Weak Spot in Spotify’s Model
Despite its success in premium subscriptions, Spotify’s ad-supported revenue remains a concern. The platform has nearly 425 million ad-supported users, yet advertising revenue only contributes 27% of total revenue, a figure that has been declining as a percentage of total sales.
Spotify has taken steps to improve ad monetization, including a partnership with Trade Desk, an advertising platform that enhances Spotify’s ability to target users with programmatic ads. Management expects ad-supported revenue to significantly grow in 2025, potentially unlocking billions in new revenue.
Competition from Apple and Amazon – Can Spotify Maintain Market Leadership?
The biggest risk to Spotify remains competition from Apple and Amazon, which own their content ecosystems and can afford to subsidize streaming services to attract users. Apple Music and Amazon Music continue to grow, and if these companies were to undercut Spotify on pricing or gain exclusive content rights, it could pose a serious threat.
Spotify has countered this risk by diversifying its content offerings, launching podcast exclusives, video podcasts, and audiobooks, making it more than just a music streaming service. With over $1 billion invested in podcasting, Spotify aims to build an end-to-end audio ecosystem, making its platform indispensable to users.
Valuation Outlook – Can Spotify Stock Hit $770?
As Spotify’s profitability stabilizes, its valuation is transitioning from a price-to-revenue (P/S) model to an EPS-based model. Analysts currently value SPOT at $590, but with its earnings expected to grow 83% in 2025 and 30% in 2026-27, the stock could reach $770 by the end of 2026 if it maintains a growth PEG ratio of 2.5x, in line with Nasdaq tech stocks.
With its rapidly improving fundamentals, declining content costs, and strong free cash flow growth, Spotify’s valuation remains compelling.
Is Spotify Stock a Buy, Hold, or Sell?
Spotify’s transition to profitability, combined with its premium subscriber growth, declining content costs, and surging free cash flow, makes NYSE:SPOT a strong buy for long-term investors. While competition from Apple and Amazon remains a risk, Spotify’s diversified content strategy, pricing power, and ad revenue expansion make it well-positioned for further gains.
With analysts raising their price targets toward $600-$770, Spotify could remain one of the best-performing tech stocks in 2025 and beyond. Investors looking for a high-growth streaming stock with strong fundamentals should continue to watch Spotify’s real-time stock performance.
