Spotify (SPOT) Sells Off Sharply as Expectations Reset. The Bull Case Still Holds

Spotify (SPOT) has sold off sharply, but the underlying story remains intact, with the recent pullback appearing more like a reset in expectations than a break in the story, keeping the bull case intact. While the stock is still down roughly 35% from its June 2025 highs, I think that weakness has created a compelling opportunity for the global leader in music streaming. The business continues to show pricing power, expanding margins, and strong engagement even as sentiment has turned more cautious.

A key debate is the impact of artificial intelligence (AI), with some investors worrying that generative music tools could weaken Spotify’s moat or pressure economics with the labels. I see it differently. Spotify’s scale, user base, and label relationships position it to turn AI into a monetization lever rather than a structural threat. Put it all together, and I remain bullish on SPOT.

The Core Business Still Looks Stronger Than the Stock Suggests

At the highest level, Spotify still has one of the best long-term user growth stories in large-cap internet. I see a path to 1.1 billion monthly active users (MAUs) by 2030, which would still represent only about 18% of the global population over age 15. That tells me the runway is far from over.

More importantly, the current business is holding up well. Spotify has already proven that music streaming is not some fragile discretionary habit. It has pushed through multiple price increases in many markets with only modest churn. In the U.S., where pricing power is under the closest watch, the latest data after the January 2026 Premium price hike looked encouraging. According to preliminary engagement data, daily and weekly active user trends remained broadly stable, and user stickiness actually improved, with the DAU/WAU ratio rising from 63.9% pre-hike to 65% post-hike. 

That is exactly what the bulls want to see. Pricing is the linchpin of the streaming thesis, and so far, Spotify continues to show that consumers are willing to pay more for the service.

Margin Expansion Is Real, Not Theoretical

The part of the Spotify story I think investors still underappreciate is the margin structure. For years, Spotify was treated as a scale story with uncertain profitability. That is changing. In early 2026, Spotify effectively answered concerns that label renewals would crush gross margins. Instead of margin pressure, the company guided to a Q1 2026 gross margin of 32.8%, up 130 basis points year-over-year.

More significantly, management indicated that Premium gross margins were driving improvement. That matters because Premium is the foundation of the model.

Some of the market had expected direct publishing deals and content renewals to create real pressure in 2026. That has simply not shown up the way bears feared. Revenue is outrunning content cost inflation, and some analysts now expect EBITDA margins to keep expanding by roughly 150 to 200 basis points per year following the major cost rationalization efforts Spotify completed earlier.

This is also where Spotify’s product strategy helps. The company has consistently added features that improve the value proposition first and monetize them more effectively later. Podcasts, audiobooks, music videos, and creator tools all make the platform stickier. Once that engagement is established, monetization can follow on better terms.

AI Looks More Like an Upside Lever Than a Threat

I think AI is the most misunderstood part of the Spotify story. The bear case says generative AI could commoditize music, hurt the value of the existing catalog, and push Spotify into tougher economics with labels. There is some theoretical risk there, but in practice, Spotify is probably better positioned than almost anyone to benefit.

First, Spotify already has enormous global scale and a deeply engaged audience. Second, AI-native music apps remain tiny compared with Spotify’s platform. Third, Spotify has the consumer interface, recommendation engine, and discovery tools to integrate AI creation and personalization in ways that enhance the platform.

I think the most likely outcome is that AI becomes part of a higher-priced premium or “superfan” tier. That could include things like AI-assisted playlisting, custom audio experiences, remixing tools, or the ability for users to generate derivative works. Yes, Spotify will need new contracts with the labels for some of these services, and those deals may affect gross margin.

However, Spotify is negotiating from a position of strength as the largest global digital service provider (DSP), and its unit economics should still be better than those of smaller AI-first players.

Valuation Is Rich, but Justified by the Setup

Traditional valuation screens will tell you Spotify looks expensive. The stock trades at a forward P/E of around 43x earnings and about 35x operating cash flow, well above sector medians. 

On the surface, that looks hard to defend. Yet I do not think Spotify should be judged like a mature, slow-growth media business. It is a category leader with real pricing power, significant margin expansion potential, and a long user runway ahead. So yes, Spotify is not statistically cheap. However, I think it is reasonably priced for a business that still has multiple self-help levers and a very credible path to higher earnings power.

Wall Street’s View

According to TipRanks, the average rating on SPOT is Strong Buy, with 17 Buy, five Hold, and no Sell ratings. Based on 22 Wall Street analysts offering 12-month price targets for Spotify, the average price target is $628.90, implying 18.34% upside from the last price of $531.45.

Conclusion

I am bullish on Spotify because the investment case is getting stronger in the areas that matter most: pricing power, margin expansion, and product-led monetization.

The stock has already corrected sharply from its 2025 highs, but the underlying business has not cracked. User engagement remains resilient after price hikes, gross margins are moving higher, and AI looks increasingly like a premium upsell opportunity rather than a structural threat. 

To me, this pullback looks like an opportunity to own a category leader that is becoming both more profitable and more strategically interesting.