How is it that a company that showed no signs of profit for almost 18 years ends up with a valuation of €100 + billion and with an owner in the billionaire class?

Years, Yet a Market Darling — Bubble or Brilliance?

This is the story of Spotify (ticker: SPOT), founded in 2006 and publicly listed in 2018. It recorded its first profit in 2024, and as of February 5, 2025, the company has a market capitalisation of €125 billion and a normalised (P/E) ratio of 108, according to IG Trading (this figure varies based on price movement).

This raises the question: How can a company with a prolonged history of losses and only a recent show of profitability command such a high market valuation?

Spotify’s Business Model and Revenue Streams

To better understand this paradox, I reviewed the 2023 financial statementsto create a picture for myself of how the company operates and to provide insight as to how it creates its market value.

Spotify operates on a subscription-based business model, emphasising user growth, retention, and pricing power over immediate profits. In plain language, they focus on building market share and creating market dominance — and cash in later.

The company had (2023 financials) over 600 million monthly active users, including ± 236 million premium subscribers.

Its revenue model comprises two primary streams:

Premium Subscriptions: This contributes 87% of total revenue, with users paying monthly fees for an ad-free experience, higher audio quality, and offline playback. In 2023, Spotify had 236 million premium subscribers, with revenue growing 13% year-over-year, though average revenue per user (ARPU) declined by 3%.

Ad-Supported Revenue: The remaining 13% of revenue comes from advertisements in the free tier, growing 14% year-over-year. This includes display, audio, and video ads across music and podcasts.

Financial Performance and Free Cash Flow

In 2023, despite reporting a net loss of €532 million, Spotify demonstrated strong cash flow generation, reinforcing its ability to sustain operations and invest in strategic growth initiatives. The company recorded a positive free cash flow of €678 million, a significant increase from €21 million in 2022.

This improvement was primarily driven by a €278 million reduction in; operating loss adjusted for non-cash items such as depreciation, amortisation, and share-based compensation expenses, along with favourable working capital movements of €273 million, particularly in trade liabilities and deferred revenue.

Spotify’s cash and short-term investments totalled €4.214 billion as of December 31, 2023, marking an €864 million increase from the previous year.

This strong liquidity position enhances the company’s financial flexibility, allowing it to pursue strategic investments, acquisitions, and shareholder value initiatives. With robust cash reserves and increasing free cash flow, Spotify is well-positioned for continued growth, product innovation, and market expansion while ensuring financial resilience amid evolving economic conditions.

What is Driving Investor Sentiment?

Investor sentiment around Spotify remains highly positive due to several key factors:

1) Sustained Revenue Growth: Particularly in premium subscriptions and advertising, signalling strong long-term demand.

2) Expansion into Podcasts and Audiobooks: Suggesting additional monetisation opportunities that could significantly boost profitability.

3) Cost-Cutting Initiatives: Including reducing podcast investments and optimising operational efficiencies, reassuring investors about potential profitability improvements.

4) Broader Market Trends: Favouring tech and digital subscription-based businesses, elevating Spotify’s appeal as a long-term winner in the streaming space.

5) Optimism Surrounding AI-Driven Recommendations and Targeted Advertising: Fuelling expectations of revenue growth and margin expansion.

Future Prospects and Growth Drivers

Spotify’s future success hinges on several factors:

1) Subscription Price Increases: If Spotify can raise prices without losing subscribers, revenue and profitability will improve. Recent small increases have had minimal churn effects.

2) Podcast & Audiobook Expansion: Spotify is investing in exclusive podcasts and audiobooks as new monetisation streams, including its Spotify Audience Network (SPAN), a growing ad marketplace.

3) User Growth in Emerging Markets: The platform continues to expand into Latin America and Asia, where revenue per user is lower, but long-term growth potential is high.

4) Better Margins on Advertising: Spotify has been optimising ad revenues, particularly from podcasts, and introducing more targeted advertising models.

Financial Risk Assessment

Spotify maintains a moderate level of financial leverage, with a debt-to-equity ratio estimated at around 0.62. While this indicates a reliance on debt financing to support expansion and operations, the company has diversified funding sources, including external borrowings, equity offerings, and cash flow from operations. The primary components of Spotify’s debt include Exchangeable Notes, which mature in 2026, and lease liabilities related to its global office footprint.

Although this level of debt is not excessive, it does pose potential risks if interest rates rise or growth slows. Higher borrowing costs could impact profitability and limit financial flexibility.

Despite these risks, Spotify’s strong cash reserves of €4.214 billion and positive free cash flow of €678 million provide a buffer against potential financial headwinds. The company’s ability to manage working capital efficiently and sustain revenue growth will be crucial in mitigating risks associated with its debt obligations.

Share Repurchase Program

Since August 2021, Spotify has been conducting a share repurchase program, authorised for up to $1 billion in buybacks and set to expire in April 2026. The program is designed to enhance capital flexibility and optimise shareholder value while aligning with the company’s long-term investment strategy. As of December 31, 2023, Spotify had repurchased 469,274 shares for €91 million under this initiative.

In 2023 alone, the company executed repurchases totalling 4.45 million shares, although this figure includes transactions related to treasury stock and employee stock plans. By the end of the year, €895.55 million in repurchase authorisation remained available, providing Spotify with room to adjust its strategy based on market conditions and business priorities.

The repurchase program serves multiple purposes. Reducing the number of outstanding shares can enhance earnings per share (EPS), making the company appear more profitable on a per-share basis. Additionally, share buybacks create demand, potentially supporting the stock price during periods of volatility. Investors often view share repurchases as a signal of confidence from management, suggesting that leadership believes the stock is undervalued or that buybacks are the most effective use of available capital.

However, the long-term impact of the repurchase program depends on Spotify’s ability to sustain revenue growth and improve profitability. While buybacks can temporarily boost EPS and stabilise stock prices, they do not inherently create lasting shareholder value unless supported by fundamental business performance and strategic investments. Given the company’s strong cash position of €4.214 billion and positive free cash flow of €678 million in 2023, Spotify is well-positioned to maintain financial flexibility while balancing capital returns with long-term expansion.

Lessons from Market Bubbles and Speculative Manias

Howard Marks, in his memo bubble.com, highlights the cyclical nature of speculative bubbles, where enthusiasm for groundbreaking technology and transformative business models typically leads to unsustainable valuations. His comparison to the South Sea Bubble and the dot-com boom underscores a recurring theme: investors frequently justify sky-high valuations based on potential rather than actual financial performance. Is his same dynamic is at play with Spotify?

Spotify, like many other high-growth tech firms, benefits from the prevailing market belief that a company doesn’t need to be profitable today as long as it dominates the future market. Investors have seen companies like Amazon survive decades without profit while growing into behemoths. The problem, as Marks points out, is that dominance alone does not guarantee lasting returns for shareholders. History is filled with companies that changed the world but failed to reward investors due to competition, cost structures, or unsustainable valuations.

One of the key points Marks makes is that markets are regularly driven by sentiment, not fundamentals, particularly during periods of optimism. Investors look past traditional valuation metrics in favour of narratives: the idea that Spotify’s vast user base and network effects will eventually result in pricing power and margin expansion. However, as seen in past bubbles, this optimism can become detached from reality when companies fail to meet the market’s lofty expectations.

Spotify’s valuation also exhibits another classic feature of speculative cycles: fear of missing out (FOMO). Investors see major institutional and retail support behind Spotify and fear that exiting too early means missing out on a future explosion in value. This behaviour — chasing returns based on past success rather than rational valuation — has been at the core of every major financial bubble.

Valuation vs. Reality

Based on its current free cash flow and assuming a 3% (economic growth) annual growth rate, a 10% weighted average cost of capital (WACC — required return), and a 10-year forecast, an intrinsic valuation for Spotify’s stock is €50.61 per share — far below the current market price of €621.77. This suggests that Spotify’s stock is substantially overvalued, meaning that much of its current valuation is driven by market optimism and growth expectations rather than fundamental financial metrics.

This valuation serves as a starting point for assessing Spotify’s intrinsic value based on fundamental cash flow assumptions. The 3% growth rate reflects a baseline GDP growth assumption, while the 10% WACC represents the required return for investors.

However, this is just a base model — not a definitive valuation. The stock market operates on expectations, sentiment, and unpredictable factors that can drive prices well beyond intrinsic estimates.

This analysis should not be interpreted as a buy or sell recommendation but rather as a framework to build upon with more refined assumptions, scenario analysis, and more in-depth research into Spotify’s future growth prospects and risks. Ultimately, markets will do what they do, and price movements may not always align with fundamental valuations.

While investor sentiment and growth prospects play a key role in stock pricing, the significant gap between Spotify’s intrinsic valuation and its market price highlights the risks associated with investing based solely on future expectations. The company’s ability to sustain revenue growth, improve margins, and maintain positive free cash flow will be critical in justifying its current valuation over the long term.

Conclusion

Spotify’s high valuation is partly justified by its strong user base, growing revenue, and free cash flow generation. However, it is also a speculative bet on continued growth and pricing power.

The market’s willingness to overlook past losses and bet on future expansion has made Spotify’s stock price and Daniel Ek’s net worth soar. Whether this is sustainable or a bubble in the making remains to be seen.

Spotify’s €100 + Billion Paradox: Profitless for 18 Years, Yet a Market Darling — Bubble or Brilliance?