Key Points
While the company saw solid Q1 growth, its premium subscriber guidance spooked investors.
And the stock has fallen, but its valuation is still not cheap.
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It's been a tough year for Spotify's (NYSE: SPOT) stock, and things didn't get any better when it reported its Q1 results late last month. The stock is now down about 28% on the year, as of this writing.
Let's take a closer look at the company's recent results and prospects to see if investors should buy the dip.
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Solid growth
After raising prices in the U.S. earlier this year, there has been a worry among some investors that Spotify's premium subscriber growth would slow. That finally showed up in its guidance, as it projected premium subscribers to grow 8% year over year to 299 million in Q2, falling just shy of analyst estimates for 300.3 million.
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Premium memberships account for the vast majority of Spotify's revenue, and these subscribers are the lifeblood of the company. For Q1, premium subscribers climbed 9% year over year and 1% sequentially to 293 million, adding 3 million subscribers. Premium revenue, meanwhile, climbed 10% to 4.15 billion euros ($4.85 billion).
Ad-supported users rose 14% year over year and 1% quarter over quarter to 483 million. Ad-supported revenue, however, fell 5% to 385 million euros ($450 million).
Total revenue rose 8% to 4.53 billion euros ($5.3 billion), edging past its guidance for revenue of 4.5 billion euros ($5.26 billion). Total monthly active users jumped 12% to 761 million, above its 759 million forecast. Earnings per share (EPS), meanwhile, more than tripled to 3.45 euros ($4.03), as gross margins increased by 133 basis points. Premium gross margin rose 129 basis points, while ad-supported gross margins fell 102 basis points.
Looking ahead, Spotify guided for Q2 total revenue of 4.8 billion euros ($5.6 billion), representing 15% growth and total MAUs of 778 million, representing 12% growth.
Is the stock a buy on the dip?
Spotify continues to turn in solid growth, and it is really focused on improving growth in its ad-supported tier by completely rebuilding its adtech stack to help improve monetization and capture a bigger market share. This has created some short-term headwinds, but it thinks the move to biddable buying is the right long-term move.
Meanwhile, the company is also looking to lean into artificial intelligence (AI) to help improve personalization and increase user engagement. It's also honing its marketing message to better promote features on its premium tier.
However, even after the pullback, the stock is still not cheap, trading at a forward price-to-earnings ratio (P/E) of over 29 times 2026 estimates. With momentum lost and a still healthy valuation, I'd continue to stay on the sidelines.
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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Spotify Technology. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
