1 Super Streaming Stock Down 37% You'll Regret Not Buying on the Dip, According to Wall Street

It has been a volatile year for the stock market, with investors having to navigate the ongoing geopolitical tensions in the Middle East, new leadership at the Federal Reserve, and a series of new tariffs imposed by the Trump administration. But Spotify (NYSE: SPOT) stock is down 37% from its all-time high for a different reason.

The company operates the world's largest music streaming platform, and management is currently investing less aggressively in growth in order to prioritize profitability. The strategy is working very well, but it has forced investors to reconsider Spotify's previously elevated valuation.

According to Wall Street, the recent dip might be a great buying opportunity. The majority of analysts tracked by The Wall Street Journal have rated Spotify stock a buy, with none recommending selling. Plus, their average price target points to substantial potential upside over the coming 12 months. Here's why their bullishness might be justified.

Image source: Getty Images.

Transforming the user experience through technology

Most music streaming services offer similar content catalogs, because a small handful of record labels control most of the industry's rights, and they want their artists to reach the widest possible audience. Therefore, Spotify can only differentiate its service from the competition by offering a better user experience, and it's leaning heavily on technologies like artificial intelligence (AI) to do so.

Spotify has a growing portfolio of AI-powered features that are driving engagement. There is Prompted Playlist, which will curate custom music playlists based on a description provided by the user. Then there is AI DJ, which autonomously plays songs based on a user's listening history, complete with a software-powered voiceover.

Over the last few weeks, Spotify started rolling out a niche feature called Running Mode, which is tailored to the fitness community. A user can tell Spotify to craft a playlist based on the length of their workout, and it will group a series of appropriate songs together based on their beats per minute, and the user's individual tastes.

The more time a paying subscriber spends on Spotify, the more likely they are to stick around for the long term. The more time a free user spends on the app, the more likely they are to convert into a paying subscriber. That is why the company is focusing so heavily on developing features to lift engagement.

Sacrificing revenue growth for higher profits

During the second quarter, Spotify had a record 300 million premium subscribers, and another 494 million free monthly active users who were monetized by advertising. The company generated a combined $5.5 billion in revenue from both user categories, which was up 14% year over year.

Spotify could have grown its revenue even faster if it spent more aggressively in areas like marketing, but management is prioritizing profitability instead. As a result, the company increased its total operating expenses by just 3% year over year to $1.08 billion during the quarter.

With the money coming in (revenue) growing much faster than the money going out (operating expenses), Spotify managed to generate $628 million in net income during Q2, which was a massive improvement over the $99 million net loss it produced in the same quarter last year.

This is really important because Spotify will have a more sustainable business over the long term if its profits continue to increase. Over time, this will give management more flexibility to redirect money into growth initiatives like marketing and research and development, without having to rely on debt or external funding from investors.

Wall Street is very bullish on Spotify stock, and I concur

The Wall Street Journal tracks 42 analysts who cover Spotify stock, and 26 of them have given it a buy rating. Seven others are in the overweight (bullish) camp, while the remaining nine recommend holding. None recommend selling.

The analysts have an average price target of $600, implying a potential upside of 26% for Spotify stock over the next 12 months or so. The Street-high target of $720 suggests the stock could soar by 51% instead.

Based on Spotify's trailing 12-month earnings of $15.86 per share, its stock is trading at a price-to-earnings (P/E) ratio of 30. That is a slight discount to the Nasdaq-100 index, which has a P/E of 32.6, so Spotify might be considered undervalued.

Moreover, Wall Street's average estimate (provided by Yahoo! Finance) suggests the company could grow its earnings to $18.20 per share in 2027, placing its stock at a forward P/E of 26. In other words, the stock would have to climb by 25% over the next 18 months or so to match the P/E of the Nasdaq-100, so Wall Street's average price target of $600 certainly looks achievable.

Reaching $720 might take more time, but it will be possible in the future, particularly if Spotify's bottom line keeps improving at the current pace.

Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Spotify Technology. The Motley Fool has a disclosure policy.