Key insights
- A DCF analysis suggests Spotify is overvalued by approximately 39%, with a fair value of around $300 compared to its current price near $495. The analysis uses a 12% short-term FCF growth rate and a 10.9% WACC. The author argues that justifying the current price requires either unsustainably high growth or a significantly lower beta, implying potential downside risk for the stock.
Spotify has been on an absolute tear lately, hovering around $495 a share. We all know they've made a massive pivot from a "growth-at-all-costs" model to focusing on profitability, and their recent Free Cash Flow generation shows it.
But I wanted to see if the current valuation actually makes sense based on their cash-generating ability. I ran a 5-year DCF model using Aperite / my valuation tool, and the results suggest the market might be getting a little ahead of itself.
Here are the assumptions I used for the model:
- Current Price: $495.82 * Base Free Cash Flow: $2.87B (Aligned with recent levered FCF) * Short-Term Growth Rate (Years 1-5): 12% (Assuming steady premium price bumps, ad-tier scaling, but acknowledging MAU hyper-growth is slowing) * Terminal Growth Rate: 2.5% (Standard perpetuity/inflation rate) * WACC (Discount Rate): 10.90% * Risk-Free Rate: 4.50% * Equity Risk Premium: 5.50% * Beta: 1.70 (Historical beta. Definitely high, but reflects the stock's historical volatility). * Shares Outstanding: 205.88M
The Verdict: The model spits out an Intrinsic Value of $300.42 per share.
Compared to the current price of ~$495, that implies the stock is overvalued by roughly 39%.
My Takeaway: To justify the current $495 price tag, you either have to assume Spotify will maintain 20%+ FCF growth for the next five years (which seems incredibly difficult as market penetration peaks), or you have to drastically slash their Beta/WACC to assume they are now as stable as a utility company.
Even if I lower the Beta to 1.3 to reflect a more mature, less volatile company (which drops the WACC), the intrinsic value still struggles to breach $400 without extremely aggressive growth assumptions.
What do you guys think? Am I being too conservative with a 12% FCF growth rate? Are audiobooks and video podcasts going to juice the top line more than I'm giving them credit for, or is SPOT currently priced for absolute perfection?