Spotify Technology S.A. (NYSE:SPOT) closed at $527.45 on October 13. The stock has returned 4.6% over the last six months, compared to a 21.5% return by the Insider Monkey Billionaire Index and 14.0% for State Street SPDR S&P 500 ETF Trust.
Spotify sells access to music it does not own. Every song someone plays sends a royalty to the record label that holds the rights, and the labels negotiate what that royalty is. That single arrangement decides how much of your subscription Spotify is ever allowed to keep.
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People Do Not Cancel Music:
Music is a habit rather than a purchase. Once someone has built playlists and followed artists on one service, moving to another means starting again, and most people never bother. That is why Spotify keeps the customers it wins.
It is also still growing. Revenue rose 13.90% in the most recent quarter, which is quick for a company already this large, and most new subscribers arrive without Spotify paying much to find them.
The balance sheet is the strongest part of the case. Spotify holds about $7 billion in cash against a few hundred million of debt, so it pays for its own growth and owes almost nothing to anyone. That profile is what we were looking for in the names we backed for high returns this year, where the one we ranked first is up 24% since January.
The Labels Set the Ceiling:
Gross margin is 32.77%, which means most of every subscription dollar leaves as a royalty before Spotify pays a single employee. Raising the price does not fix that, because the labels are paid a share of revenue and their share goes up too.
So the growth arrives at a profit margin Spotify cannot improve. Adding subscribers makes the company bigger without making each subscriber much more valuable, which is what separates it from the growth stocks Dan Loeb has been adding. The one he holds most of is up 9% since.
The Valuation Case:
Spotify trades at 28.57 times next year’s expected earnings, against 27.98 times what it earned last year, on analyst consensus estimates. A forward figure above a trailing one is unusual, and it means analysts expect the company to earn less next year than it just did.
A price near 30 times earnings is normally reserved for companies expected to grow profits quickly, and this one is expected to do the opposite, making the valuation hard to justify. The verdict is that Spotify looks expensive for what the business is currently set up to deliver, and the cash pile is most of what holds the case together.
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Conclusion:
Spotify has built something people pay for every month and rarely cancel, and it is still growing quickly for its size. It funds itself out of its own cash and owes almost nothing. However, it is renting its product from the record labels, and they decide how much of each subscription it keeps. That is why a company this large still earns a margin closer to a retailer than a software firm. The market has already started pricing in lower profits next year. Watch the gross margin, because that is the line the labels control.
Market Sentiment:
Spotify Technology S.A. was held by 112 hedge funds with a combined stake value of about $8.79 billion at the end of Q2 2026 in the Insider Monkey database. This is down from 123 hedge fund holders with a cumulative investment value of around $8.83 billion in the previous quarter.
While we acknowledge the risk and potential of SPOT as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than SPOT and that has 10,000% upside potential, check out our report about this cheapest AI stock.
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This article is originally published at Insider Monkey.
