Spotify's Q3 report was solid. Revenue was in line with our expectations, while EBIT came in slightly ahead on a stronger gross margin and lower-than-expected OpEx growth. Premium subscribers beat, suggesting that the added friction in the free tier passed its first test without hurting subscriber growth, and the ad-supported business returned to double-digit growth. In our view, the most encouraging part of the report was the Q4 guidance, where the EBIT guide was clearly above our estimate and implies a return to year-on-year margin expansion. This supports the view we have held since Q1 that the 2026 OpEx step-up is temporary and non-structural. Following the report, our revenue estimates are broadly unchanged, while we raise our EBIT estimates by 2-4% on lower OpEx. The revisions shift our estimates increasingly toward monetizing an engaged Premium base at expanding margins, which we see as a higher-quality and more defensible basis. We raise our target price to USD 635 (was USD 580) and reiterate our Accumulate recommendation.

Friction passes its first test as subscribers beat

In our view, Q3 confirmed that Spotify's strategy is working as intended. Over recent quarters, the company has deliberately made its free tier somewhat less generous in selected emerging markets, accepting slower growth in total users (MAUs) in exchange for converting more listeners into paying Premium subscribers. The key question going into the report was whether this would hurt subscriber growth, which it did not. Spotify added 6 million subscribers to reach 306 million, slightly above our and the company's own guidance, while total users grew in line with guidance to 788 million. At the same time, Spotify continues to earn more from each subscriber, as recent price increases flow through. Together, this drove revenue growth of 16% to roughly 5.0 BEUR, in line with expectations. The advertising business, long the weak spot in the story, also returned to double-digit growth (+10%, up from just 1% in Q2). Profitability also moved in the right direction. The gross margin continued to improve year-on-year, and operating profit (EBIT) of 672 MEUR was slightly ahead of our estimate.

Q4 guidance confirms cost moderation, estimates edge up

The Q4 EBIT guide of 820 MEUR (~15.8% margin) was clearly above our 785 MEUR estimate and above the 15.5% margin in Q4'25, confirming the moderation in OpEx growth that management outlined at the May Investor Day. In contrast, the Q4 revenue guide of ~5.2 BEUR was slightly below our 5.25 BEUR estimate despite a larger FX tailwind. User guidance was in line with our estimates, and we leave our user base estimates unchanged. However, we lower our advertising revenue estimates, particularly for 2027-2028, as we take a more cautious view on ad monetization given the continued pricing softness. Net-net, our revenue estimates for 2026-2028 are broadly unchanged, as slightly higher Premium revenue partly offsets the lower advertising estimates. Our EBIT estimates increase by 2-4% (2026e: 14.7% margin; 2027e: 16.3%), mainly driven by lower OpEx, especially in R&D. At the same time, we lower our cash conversion assumptions slightly, as rising cash taxes and a smaller working-capital tailwind mean that free cash flow grows more slowly than EBIT. Overall, the revisions tilt our estimates further toward monetization and margins, and we carry slightly higher conviction in the longer-term margin path.

Valuation remains attractive, though upside is more moderate

The share rose ~11% on the back of the report. On our revised estimates, Spotify now trades at EV/EBIT of 26x-20x, EV/FCFF of 26x-21x, and EV/Gross Profit of 12x-10x for 2027-2028. The multiples are around the midpoint of our acceptable ranges for 2027 and below them for 2028. With the OpEx step-up now behind its peak and the friction strategy showing early signs of working as intended, we see Q3 as the quarter that turned most of the near-term noise of 2026 into a clearer signal. Our DCF value increases to USD 635 (was USD 589), mainly driven by our slightly higher long-term margin assumptions, while the lower cash conversion has only a limited impact. We continue to expect double-digit revenue growth, improving Premium monetization, and margin expansion to drive strong earnings growth in the coming years (2026-2028e EBIT CAGR: ~27%).