Is Spotify Stock a Buy Now?

It has been a volatile stretch for Spotify (NYSE: SPOT) investors. Shares of the audio streaming specialist have pulled back significantly from their 52-week high of $785, trading around $483 as of this writing. In addition, the stock is down about 17% year to date.

This sharp decline comes even though the company posted exceptional fourth-quarter financial results in February.

A pullback like this, even as the business thrives, may leave many investors wondering whether the sell-off has created a buying opportunity. After all, the underlying business continues to grow rapidly, with profit margins expanding.

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An improving business model

Spotify's fourth-quarter revenue rose 13% year over year on a constant-currency basis to €4.5 billion. The company fueled this top-line momentum with robust user growth, adding a record 38 million monthly active users during the quarter. That brought its total audience to 751 million and blasted past management's guidance of 32 million additions.

But the bigger story here might actually be profitability. For years, there was a lingering concern among investors that royalty payouts to music labels would permanently cap Spotify's profit potential. The company's recent performance, however, suggests a different reality. Spotify expanded its fourth-quarter gross margin to 33.1% -- an 83-basis-point improvement from the year-ago period. This improvement was driven by stronger profitability across both its premium subscriber base and its ad-supported free tier, management explained in its fourth-quarter update.

"Churn is low and in accordance with our expectations," noted Spotify co-chief executive officer Alex Norström when discussing recent price increases during the company's most recent earnings call.

The valuation problem

With such strong underlying fundamentals, it is worth asking why the stock is struggling to regain its previous highs. The core issue likely boils down to valuation and the heavy expectations baked into the current share price. Even after dropping about 17% year to date, Spotify shares trade at a demanding forward price-to-earnings ratio of about 33.

A valuation like this prices in not just continued strong revenue growth but further margin expansion.

And guidance suggests the recent surge in user growth is already normalizing. For the first quarter of 2026, management expects to add about 3 million premium subscribers. While this sits squarely within the company's historical range for a first quarter, it represents a sharp sequential drop from the 9 million premium users Spotify added in the fourth quarter.

Big competition

Of course, the biggest risk for Spotify has always been the same: competition. The music streaming industry remains crowded with deep-pocketed tech giants, including Apple, Alphabet, and Amazon.

While Spotify is the undisputed market leader today, it competes directly with these massive rivals.

Management is acutely aware of this dynamic and has deliberately built its product to work anywhere.

"We decided Spotify should work everywhere -- your car, your speaker, your TV, your gaming console -- regardless of whose ecosystem you're in," explained Spotify founder and executive chairman Daniel Ek in the company's most recent earnings call.

This ubiquitous integration helps Spotify defend its leadership position.

But that strategic positioning does not eliminate the deeper structural risk that tech behemoths could eventually invest more aggressively in their streaming music platforms.

And unlike Spotify, these bigger tech companies do not need their music streaming services to generate high stand-alone profits. So, they technically could price their services more competitively than Spotify can, since their streaming services are just one part of a broader ecosystem.

All of this is a way of saying that Spotify appears to be a fantastic product and an improving business, but with shares trading at 40 times earnings, the valuation doesn't leave much room for any slowdown in growth or margin compression.

Daniel Sparks and his clients have positions in Apple. The Motley Fool has positions in and recommends Alphabet, Apple, and Spotify Technology and is short shares of Apple. The Motley Fool has a disclosure policy.