Most investors would be wary of attempting to buy a stock near its highs, and much less after a recent run to the upside, thinking that they can get the proverbial rug pulled from under them. However, sometimes the fundamental picture provides enough evidence and justification to let investors buy into a rally without worrying about a top and turn.

This could be the case for shares of Spotify Technology (NYSE: SPOT), as the stock is up over 8% in a single day after the company reported its latest quarterly earnings results. More than the results themselves, the story and business model are set up for a tailwind in today’s economic landscape, supporting predictable and stable cash flows to validate higher stock valuations and ratings from Wall Street analysts.

Since Spotify is a subscription-based platform, its financial metrics are more predictable, making future projections, modeling, and valuations easier to understand. Now more than ever, inflation pressures resurging for the economy give businesses like Spotify an advantage over other industries and peers. Here’s what investors should focus on from Spotify's recent earnings report.

Spotify’s Brand Dominance: KPIs Prove Its Moat Is Stronger Than Ever

Warren Buffett likes to invest in strong and durable business moats as part of his strategy. However, when it comes to the technology sector, specifically radio and broadcasting, he seems to have backed the wrong horse by investing in Sirius XM Holdings Inc. (NASDAQ: SIRI). That stock now trades at a low of 47% of its 52-week high and a market capitalization of $9.1 billion.

On the other hand, Spotify stock trades at a new 52-week high backed by recent earnings momentum and has reached a market capitalization of up to $92 billion to lead Sirius XM stock by a wide margin. Typically, price action and market capitalization are the leading metrics that tell investors which companies might fare better in the coming quarters.

Over the past 12 months, monthly active users grew by 11% to reach a high of 640 million, but how these users are distributed should get investors thinking. 12% of the user annual growth came from premium tier subscribers, while 11% came from advertisement-based (or free) accounts.

This divergence and dynamic show that more and more people are fine with paying a subscription not to have their study session, workout, or road trip groove interrupted by advertisements. That’s where the business moat comes from and how Spotify will keep dominating.

Financially, the brand gives more to consider. Revenue jumped by as much as 19% over the year, with 21% growth coming from premium accounts and only 6% growth coming from advertising-based accounts. The best part about a business like Spotify is its high-margin nature, allowing operating profits and margins to expand nearly uninterrupted.

The company’s cash flow statement shows the true nature of Spotify's stock growth, particularly in terms of operating cash flow. Jumping by as much as 400% over the past 12 months would give investors a proxy for the true earning power of the business, which should justify an even higher valuation for the stock as well.

Wall Street’s Sentiment on Spotify Stock Points to Potential Upside

Of course, all of this evidence would go to waste if no future implications were to be made from it, and that’s something a few bold analysts on Wall Street are willing to rectify. Those at Pivotal Research decided to reiterate their Buy rating on Spotify stock and, this time, placed a price target of up to $565 a share.

To prove these recent views right, Spotify stock would have to stage an additional rally of as much as 24% from where it trades today, not to mention a new all-time high. Bearish traders get the picture, so they have recently covered some of their short positions in Spotify to correct their course.

The company’s short interest declined by as much as 9.3% over the past month alone, showing signs of further bearish capitulation in the face of all the bullish evidence being placed on the company today. And then there’s the recent institutional buying activity.

As of November 2024, those from WCM Investment Management decided to boost their stakes in Spotify stock by as much as 18.5% ahead of the big earnings announcement, bringing their net position to $1.4 billion today, or 1.9% ownership in the company.