Is Spotify (SPOT) Undervalued Amidst Strong Growth and Strategic Expansion?

The debate over Spotify's (SPOT) valuation has intensified as the music streaming giant navigates a pivotal phase in its evolution. With a trailing price-to-earnings (P/E) ratio of 73.5 as of December 2025-well above the S&P 500 average-and a price-to-sales (P/S) ratio of 5.53, Spotify appears to trade at a premium relative to both earnings and revenue. Yet, beneath these metrics lies a company experiencing robust subscriber growth, strategic expansion into high-margin content, and a forward-looking business model that could justify its lofty multiples. This article examines whether Spotify is undervalued by reconciling its current valuation with long-term growth projections and industry benchmarks.

Valuation Metrics: A Tale of Two Perspectives

Spotify's P/E ratio of 73.5 is starkly higher than the Entertainment industry average of 22.2x and its historical seven-year average of 123.11, which has declined by 41% as of 2025 according to Macrotrends. This suggests the stock is overvalued on earnings. However, the P/S ratio of 5.53, while elevated, is lower than some peers and reflects a valuation that is "only" 13.92% above its 12-month average of 7.86 as reported by FinanceCharts. This discrepancy highlights the tension between Spotify's current profitability and its anticipated future cash flows.

Analysts project that Spotify's revenue will grow by 14.5% in 2026, with earnings per share (EPS) expected to surge by up to 156.4% in some scenarios according to StockAnalysis. A forward P/E ratio of 75.04, though still above the industry average of 28.79, indicates that the market is pricing in significant future growth.

This raises the question: Is Spotify overvalued based on current earnings, or is the premium justified by its long-term potential?

Strategic Expansion and Monetization Levers Spotify's strategic initiatives provide a compelling case for long-term optimism. The company has invested heavily in AI-driven features, such as the AI Playlist and integration with OpenAI's ChatGPT, to enhance user engagement. Additionally, its expansion into audiobooks-now available in 14 global markets-and video content positions Spotify to diversify revenue streams beyond music. These moves align with a broader industry trend toward content monetization, where platforms like Netflix and Amazon Prime have demonstrated the profitability of high-margin offerings.

The company's subscriber base has grown to 281 million premium users, with 12% year-over-year growth in Q3 2025 according to TipRanks. While challenges such as slower advertising growth and potential churn from price hikes in 150+ markets persist, Spotify's ability to maintain its premium pricing power-driven by its dominant market share and sticky user base-could mitigate these risks. Deutsche Bank, for instance, reiterated a "Buy" rating with a $775 price target, citing the potential for revenue and profit growth from subscription price increases in 2026.

DCF Analysis and PEG Ratio: A Mixed Signal

Discounted cash flow (DCF) models offer a more nuanced view. Using the 2 Stage Free Cash Flow to Equity model, Spotify's intrinsic value is estimated at $689.47 to $783.61 per share, implying undervaluation by 13.1% to 28.0% according to Value Investing. These models project free cash flows growing from €2.9 billion in the trailing twelve months to €10.6 billion by 2035, driven by monetization of podcasts, audiobooks, and advertising as reported by FinanceCharts.

However, the PEG ratio-a metric that compares the P/E ratio to earnings growth-remains contentious. While one source reports a PEG ratio of 0.85 as of December 2025, suggesting undervaluation relative to growth according to AlphaSpread, others argue that Spotify's P/E of 70.6x is still 106% higher than its proprietary fair ratio of 34.7x according to SimplyWall St. This divergence underscores the difficulty of valuing a growth stock with uneven earnings but strong revenue momentum.

Long-Term Projections and Industry Context

Looking ahead, Spotify's long-term revenue growth is projected to average 12% to 14% annually, with a goal of reaching $100 billion in revenue by 2032 according to Webull. Analysts also anticipate free cash flows to grow from €2.9 billion in 2025 to €6.4 billion by 2029 as reported by FinanceCharts. These figures, if achieved, would justify a premium valuation. However, the current P/E ratio of 70.6x to 74.8x remains a hurdle, as it implies investors are paying 2-3 times the industry average for Spotify's earnings.

Conclusion: A High-Risk, High-Reward Proposition

Spotify's valuation presents a paradox: its current multiples suggest overvaluation, while its long-term growth prospects and strategic initiatives hint at undervaluation. For investors with a multi-year horizon, the company's DCF-derived intrinsic value and projected free cash flow growth offer a compelling case to overlook near-term earnings multiples. However, those prioritizing short-term returns may find the P/E ratio too steep, particularly given the risks of subscriber churn and slower advertising growth.

Ultimately, Spotify's success will hinge on its ability to monetize its expanding content ecosystem and maintain pricing power in a competitive market. If the company can execute its strategic vision-leveraging AI, audiobooks, and video content to drive engagement and revenue-its current valuation may prove to be a bargain. For now, the jury is out, but the long-term potential remains tantalizing.