Up 82% This Year, Should Investors Still Buy This Red-Hot Growth Stock?

What a year it’s been for the stock market so far. The S&P 500, Nasdaq Composite, and Dow Jones Industrial Index are up 18%, 18%, and 10%, respectively.

Yet, there are many stocks that are outperforming the benchmark indexes. Let’s have a look at one such stock: Spotify Technology (SPOT 0.63%).

Image source: Getty Images.

Spotify stock has been on a tear

When it comes to Spotify stock, one fact is undeniable: It has been a great name to own since the start of 2023. Indeed, after the stock bottomed around New Year’s Day 2023, shares of Spotify have climbed more than 330% over the following 20 months.

Granted, on a longer time scale, it’s more of a mixed story for Spotify. After debuting via an initial public offering (IPO) in 2018, the company’s shares were more or less flat for its first two years of existence. Then, the COVID-19 pandemic happened. Shares of Spotify went through the roof as lockdowns forced everyone into their homes — and onto streaming services. The stock peaked at $387 per share in early 2021. Then came the collapse.

SPOT data by YCharts

Spotify shares dropped 76% from their peak as pandemic restrictions eased and tech stocks fell out of favor in late 2021 and into 2022. By early 2023, investors could pick up shares of Spotify for under $100 per share.

What is driving Spotify’s turnaround?

So, clearly, something has changed for Spotify, but what is it?

There are several factors at play, but one of the most important reasons why Spotify’s stock has rebounded is that its management has embarked on a path of cost cutting.

First, let’s understand where most of the company’s costs come from. Spotify, as a streaming service, must pay royalties to artists and music companies whose music appears on its platform. This allows the service to stream famous songs from countless artists, from Taylor Swift to The Beatles.

In 2023 alone, Spotify paid more than $9 billion in music royalties. For context, the company generated $14.3 billion in revenue. So, about 62% of the company’s revenue was used just to pay royalties. That left $5.3 billion for everything else — employee salaries, marketing, technology, etc. So, it’s no wonder that the company’s 12-month net loss hit a low of more than $1 billion in 2023.

SPOT Net Income (TTM) data by YCharts

However, what has Wall Street so excited is that Spotify is trimming back where it can. Obviously, it still has to pay royalties, so those cuts are coming from other areas within the company. Back in 2023, the company cut around 1,500 employees, or 17% of its overall workforce, in an effort to streamline its operations and scale back some non-core business areas like its podcast unit.

What’s more, Spotify has another plan to boost its profits: Raising prices. In June 2024, the company announced that the monthly cost of its individual plan was increasing by $1 to about $12/month, while duo and family plans were increasing by $2 and $3, respectively. That should further boost Spotify’s profit by raising increasing its overall revenue.

Is Spotify still a buy now?

In short, yes, Spotify remains a solid stock for those investors who are willing to hold it for the long run. That’s because Spotify, like video-streaming giant Netflix, has carved out a massive subscriber base that appears to be durable. That’s allowed the company to raise prices and increase profits. And that’s why Spotify is making its shareholders very happy.