It’s easy to see why Spotify (NYSE:SPOT) has been on fire in 2020. SPOT stock is up more than 70% year-to-date to fresh all-time highs.

The music streaming giant signed highly coveted, exclusive podcast partnerships with the ultra-popular Joe Rogan and even-more-popular Kim Kardashian West at a time when music streaming usage is soaring thanks to the Covid-19 pandemic.

All of those pickups are against the backdrop of surging podcast ad spending with Wall Street firms ranging from Goldman Sachs to RBC upgrading shares to a Buy.

Connecting the dots, it’s clear that Wall Street is starting to see Spotify as the Netflix (NASDAQ:NFLX) of the music streaming industry, and the music streaming industry as a space that will become globally ubiquitous one day.

But — while I agree that Spotify is the undisputed king of a global music streaming industry which will be huge one day — I also see SPOT stock as having come too far, too fast in 2020.

Here’s why.

The Music King

There’s no doubt about it. Spotify is the “Music King”.

The core of Spotify’s value prop is a powerful, data-driven music recommendation algorithm that is significantly more advanced than other recommendation algorithms, and which — because of innate data advantages granted with bigger scale and increased usage — will remain the best music recommendation algorithm out there for the foreseeable future.

This superior recommendation algorithm enables a better user experience. Consequently, Spotify has leveraged its superior algorithm to become the world’s largest music streaming platform.

But the company isn’t stopping there. Instead, management has taken a page out of the Netflix playbook, and aggressively invested in acquiring and creating original, exclusive content. The idea is that the dual threat of superior technology and superior content will drive global music industry dominance.

Spotify is off to a great start in creating a podcast content moat. In 2020 alone, the company has signed exclusive podcast partnerships with Joe Rogan (who is arguably the most popular celebrity personality among young males) and Kim Kardashian West (who is arguably the most popular celebrity personality among young females).

So long as Spotify continues to build out this original podcast portfolio, the company will only expand its dominance in the music streaming industry. Also, because consumer demand for listening to music is large and ubiquitous, it is highly likely that the paid music streaming industry becomes globally quasi-ubiquitous over the next few years.

In other words, Spotify projects as the leader in a globally huge industry one day.

SPOT Stock Is Fully Valued

Despite the company’s favorable growth prospects, I wouldn’t chase the rally in SPOT stock here.

Why?

One word: valuation.

Put simply, Spotify stock is already fully valued to take over the world.

There are 7.7 billion people in the world. The average global household size is 4.9. That pegs the number of households in the world at roughly 1.6 billion. That number will rise to 1.8 billion by 2030 thanks to population growth.

About 60% of the world is connected to the internet today. Given urbanization and digitization trends, that number will likely rise to 80% by 2030. That implies ~1.4 billion internet households by then.

In 2018, about 255 million households paid for a music streaming service. Given current growth trends, I believe that number will rise to 840 million by 2030, representing about 60% penetration into internet households.

This is a minimal overlapping industry. That is, because no one has exclusive rights on songs, there will be little overlap between Apple Music users and Spotify users. To that end, Spotify’s near 40% global market share in 2018 is quite impressive. But, also to that end, this 40% number won’t rise by much. I think 50% market share is optimistic by 2030, for about 420 million paid subs.

At roughly $7 per month, that implies 2030 paid revenues of ~$35 billion. Throw in $2.5 billion for advertising revenues. That gives you total revenues of ~$37.5 billion. Assume ~35% gross margins and a ~20% opex rate (optimistic assumptions). Assume a 20% tax rate and 220 million diluted shares by then.

The math there gets you to somewhere around $20 in earnings per share.

Throw a tech-stock-average 25-times forward earnings multiple on that. You get a 2029 price target for SPOT stock of $500. Discount that back by 10% per year. You arrive a 2020 price target of about $210.

Bottom Line on Spotify Stock

I love Spotify as a company. I love Spotify as a service. And, for a while, I loved Spotify as an investment.

But that was back when the valuation on SPOT stock was tangible and left room for upside potential.

Today, that’s no longer the case.

SPOT stock has come too far, too fast, and the valuation is over-inflated by Covid-19, exclusive podcasts and Wall Street upgrades hype.

Fade this rally. Let all the hype die down. Let the stock price come back into tangible territory. Then buy the dip.