Spotify Stock Is Down 26%. Should You Buy the Dip, or Run for the Hills?
When it comes to artificial intelligence (AI) stocks, investors tend to think of chip giants like Nvidia or Micron Technology. But AI is starting to create value for many companies, even those not operating at the industry’s frontier, and that spells an opportunity for investors.
Spotify (SPOT +3.50%) runs the world’s largest music streaming platform, and it’s betting big on AI to enhance the listening experience, which is boosting engagement and, therefore, revenue. The company reported a strong set of operating results for the third quarter of 2026 (ended Sept. 30) last week, which sent its stock soaring by more than 11%.
But the stock is still down 26% from last year’s record high as I write this on Oct. 27, so should investors take this opportunity to buy the dip, or will the recent recovery run out of steam?
Image source: Getty Images.
Artificial intelligence is transforming Spotify
Most music streaming services offer the same content catalog, because a small handful of record labels control most of the industry’s rights, and they want their artists to reach as many listeners as possible. That means the primary way Spotify can differentiate its platform from the competition is by delivering a better user experience, and AI is central to its strategy.
AI is embedded in Spotify’s recommendation algorithm, where it learns what type of music each user likes, so it can feed them more of it. AI also powers a growing number of features, like Prompted Playlist which will curate a basket of songs based on a description provided by the user. But management is aiming to turn Spotify into the world’s first agentic media platform, which will introduce a range of unique capabilities, and some of them are already live.
For example, users can ask Spotify to analyze their listening history dating all the way back to 2008, and surface their favorite songs. It can also ask the platform to mix tracks together to create the perfect playlist, organized by factors like beats per minute. It can also recap an audiobook the user is listening to, up until the point they previously stopped.
Spotify can integrate with third-party agentic systems like OpenAI’s Dots and Meta Platforms‘ Muse, enabling users to control their audio environment while completing other tasks. For example, users can ask Muse to build a playlist through Spotify, tailored to a specific road-trip destination.
SPOT – Spotify Technology
$557.24+$18.84 (+3.50%)
NYSE · As of 4:00 PM ET 10/29/26
Spotify’s profits could soar from here
Spotify had 306 million Premium subscribers at the end of the third quarter, in addition to 499 million free users who were monetized through advertising. The company generated $5.5 billion in revenue from both categories during the third quarter, a 16% increase from the year-ago period.
However, Premium subscribers accounted for over 90% of that total revenue, so converting free users into paying members is a top priority. Developing new AI-powered features that are only available to subscribers is one way Spotify is doing that, but this strategy requires significant investment. As a result, the company’s total operating costs increased by 25% to $1.1 billion during the third quarter, with research and development spending alone climbing by 35%.
Spotify still managed to turn a profit of $578 million during the quarter, but that was down 42% from the year-ago period. Fortunately, management says operating expense growth has likely peaked and will moderate from the fourth quarter onwards, so profits could grow materially from here.
Spotify stock might be a solid long-term buy
Based on Spotify’s trailing 12-month revenue of $21 billion and its market capitalization of $117 billion, its stock is trading at a price-to-sales (P/S) ratio of 5.5, making it cheaper than the technology-heavy Nasdaq-100 index which has a P/S ratio of 6.5. Moreover, Wall Street’s average estimate (provided by Yahoo! Finance) suggests the company could grow its revenue to $25 billion in 2027, placing its stock at a forward P/S ratio of 4.7.
SPOT PS Ratio data by YCharts
However, Spotify is more expensive than the Nasdaq-100 based on the more traditional price-to-earnings (P/E) ratio, which values a company based on its profits. The Nasdaq-100 has a trailing P/E of 29.5, whereas Spotify has a trailing P/E of 39.5, and a forward P/E of 33.2 (based on Wall Street’s 2027 earnings forecast). With that said, depending how quickly the company’s costs moderate from here, it could deliver better earnings than expected which would make its stock cheaper than it currently appears on a forward basis.
Longer term, Spotify could generate significant growth at the top and bottom lines. Co-chief executive Alex Norström says the platform could add “hundreds of millions” more paying members in emerging markets alone, which include regions like Asia, Latin America, and the Middle East. In fact, he has previously outlined a goal to convert 10% to 15% of the entire world’s population into paying members, representing significant potential growth from the current level of under 4%.
As a result, I think Spotify stock could be a great buy while it’s still trading below its record high, but investors should aim to hold it for at least five years to maximize their chances of earning strong returns.
Source: www.fool.com — article syndicated from the publisher’s feed; all rights remain with the original publisher.