Spotify's Q1 print was in line with our expectations, demonstrating continued operational momentum. However, Q2 guidance was mixed. While the gross margin and user metrics (MAU) came in slightly above our expectations, the EBIT guidance was soft and below our estimate, reflecting a step-up in operating expenses related to elevated marketing, cloud, and AI investments. Importantly, however, management indicated that these elevated investment levels are expected to persist for only the next quarter or two before moderating, while reiterating that full-year operating margin will still expand y/y. As such, we view the impact as time-bound rather than structural, leaving our medium-term thesis intact. In our view, the post-earnings market reaction therefore appears excessive and overly short-sighted, creating an attractive opportunity for longer-term investors to capitalize on near-term noise at compelling valuation multiples. We upgrade to a Buy recommendation (was Accumulate) while lowering the target price to USD 570 (was USD 595) on decreased estimates.

User intake slightly above expectations, profitability on target

Spotify reported Q1 MAUs of 761m and premium subscribers of 293m (Q4'25: 751m/290m), with MAUs slightly above the company’s guidance and our estimates (759m), and subscribers in line (293m), representing net additions of 10m and 3m, respectively. We view the broad-based regional MAU growth, led by Rest of World and North America, as confirming the continued effectiveness of the enhanced free tier rollout. Revenue came in at 4.53 BEUR (8% y/y, 14% FX-neutral), in line with our estimate, with premium revenue modestly above our estimate, while ad-supported revenue declined 5% y/y on a reported basis (+3% FX-neutral) reflecting near-term pricing headwinds and a segment reclassification effective Q1'26. The gross margin reached 33.0%, slightly above guidance and our estimate (32.8%), driven by Premium margin expansion. Encouragingly, FX-neutral ARPU growth accelerated to 6% in Q1, with Q2 guided to 7-7.5%, while management confirmed no surprises in churn following the US price increase, validating our pricing power thesis. EBIT landed at 715 MEUR (15.8% margin), matching our 713 MEUR estimate and well above the 660 MEUR guidance, supported by a social charges* tailwind from the Q1 share price decline (-17%) that was broadly in line with our forecast. Adjusted for this, EBIT was effectively in line with our operational expectations.

Near-term profitability trimmed, long-term thesis intact

Following the Q1 print and Q2 guidance, our estimates see modest downward revisions to near-term profitability, while revenue and longer-term forecasts remain broadly intact. The Q2 EBIT guidance of 630 MEUR points to a meaningful step-up in OpEx versus our prior estimates, which management has framed as a deliberate strategic choice. Headcount remains essentially flat, with the elevated spend reflecting compute costs for in-house AI model training and AI-assisted development tools, alongside marketing investments behind recently launched features. Meanwhile, the ad-supported business continues to face near-term pressure, but we believe the pipeline of new ad capabilities remains on track to drive acceleration in H2'26. Following the report, we leave our subscriber estimates unchanged while slightly raising our ad-supported user estimates. Our 2026e EBIT was cut by 4%, with a smaller follow-through effect on 2027-2028. For 2026, we now expect 14% revenue growth (unchanged) with a 14.5% EBIT margin (was 15.2%).

Valuation turns firmly attractive post-Q1 drop

Following the post-Q1 share price drop and our limited estimate revisions, the valuation picture has turned increasingly attractive, offering strong risk-adjusted upside on a 12-month horizon. The stock now trades at EV/EBIT of 23x-18x, EV/FCFF of 21x-17x, and EV/Gross Profit of 10x-8x for 2026-2027, all below our acceptable valuation ranges. While Q1 indicates short-term margin headwinds, we feel the medium-to-long-term thesis remains intact. We continue to see the company as well-positioned to deliver strong earnings growth in the coming years, supported by improving monetization, user growth, and margin expansion as efficiency initiatives continue to compound.