Spotify will report Q1 earnings on Tuesday, April 28, before market opens. We expect the company to demonstrate continued operational momentum, characterized by steady user growth and robust profitability improvements. While reported revenue growth continues to face significant currency headwinds, we expect the underlying business to remain strong, supported by recent pricing actions in the US and a continued focus on AI-driven operational efficiencies. Our Q1 expectations are largely aligned with the company’s guidance, although we’ve increased our EBIT estimate due to the impact of the negative share price development in Q1 (-17%) on social charges. Following recent share price strength, some of the upside we saw has already materialized. That said, Spotify is currently trading at the low end of our acceptable valuation ranges (EV/FCFF 26’: 24x, EV/EBIT: 28x, EV/GP: 12x), leaving further upside potential in the stock. However, due to the recent increase in the share price, we lower our recommendation to Accumulate (was Buy) while leaving our target price unchanged at USD 595.

Investment case relies on scale, brand, and improved monetization

Spotify remains the clear global leader in audio streaming, with +750m MAUs and +290m premium subscribers. In our view, the investment case for Spotify rests on its vast user scale and data insights, strong brand, and improving monetization potential across existing and new subscription plans, advertising expansion, and new content verticals. Having compounded scale and customer goodwill for nearly two decades, coupled with the transition to a cost-efficiency and profitability mindset in recent years, we believe Spotify is well-positioned to continue to deliver robust earnings and FCFF growth in the years to come.

We expect a profitability beat as social charges provide a tailwind

We expect continued solid operational momentum in Q1 with MAU and premium subscribers reaching 759m and 293m respectively (+8m/+3m q/q). Revenue growth will continue to be pressured by significant currency headwinds (~670 bps), and we expect reported growth of ~8% to 4.53 BEUR. Ahead of the Q1 report, we have raised our EBIT estimate to 713 MEUR (15.7% margin) from 663 MEUR, well above the company's own guidance of 660 MEUR, driven by lower-than-guided social charges* following the weak share price performance in Q1 (-17%). We expect the gross margin to improve to 32.8% (Q1’25: 31.6%) as pricing actions outpace content cost growth, while AI-driven efficiencies continue to compress R&D and G&A as a share of revenue. We remain attentive to any signs of churn following the January US price increases, the trajectory of the ad business, and the Q2 guidance. We also note that the upcoming Investor Day on May 21 represents a potential additional catalyst as management is expected to revisit long-term targets, update on the “superfan" tier initiative, and present its strategic vision for AI.

Still attractive despite recent run

The stock is up some 13% since we turned to Buy in our February update, and with only small estimate revisions into Q1 earnings, Spotify trades, based on our 2026-2027 estimates, at EV/EBIT of 28x-23x, EV/FCFF of 24x-21x, and EV/Gross Profit of 13x-11x, all below or at the low end of our acceptable valuation ranges. While some of the upside we saw has already materialized, we still view current levels as attractive to get exposure to a market-leading company with clear scale advantages and data capabilities relative to competitors, which previously has traded at rich premiums. At our target price, Spotify trades at the midpoint of our acceptable valuation ranges, which we view as justified for now. At the same time, we acknowledge that the combination of double-digit growth and margin expansion that we forecast going forward is expected to depress our estimated valuation multiples below our ranges already in 2027, which we think motivates a continued positive view on valuation, should these materialize. As such, we see the risk/reward as attractive, with a solid 12-month upside potential.