Spotify Q2'25: The valuation volume remains too high

Spotify’s Q2 print missed our top- and bottom-line estimates. Still, subscriber growth outperformed once again, driven by broad-based strength across all markets. Q3 guidance followed a similar pattern, with weaker financials but stronger user growth than expected. While the strong momentum in MAU and subscriber net adds are encouraging and vital for Spotify’s long-term leadership, the faster growth in lower-ARPU emerging markets is dilutive to near-term pricing. Combined with cautious management commentary on future price increases, this led to slight downward revisions on our ARPU forecasts. Following the Q2 report, we raised our user growth assumptions modestly, but this was more than offset by downward revisions related to pricing, FX headwinds, and slightly higher OpEx. Despite the post-earnings drop in the share price, we still view the risk/reward as unattractive. As such, we reiterate our Reduce recommendation and lower our target price to USD 625 (was USD 650).

Delivered a mixed Q2 print…

Spotify showed a strong development in user growth in Q2, with net MAU/subscriber additions being +7m/+3m above guidance as well as our estimates. However, pricing trends were a bit softer than expected (ARPU: -1% y/y vs Inderes est: 2%), even when adjusting for FX. While price hikes in 2024 contributed positively to the FX-neutral growth, strong subscriber growth in emerging markets had a dilutive effect due to lower price points. The strong user growth did not offset weaker pricing and overall FX headwinds, with revenue amounting to 4.2 BNEUR (10% y/y), below our and Street’s estimate of 4.3 BNEUR. Gross margin printed 31.5%, in line with guidance (31.5%) and our estimate. EBIT amounted to 406 MEUR (Q1’24: 266 MEUR), corresponding to a 10% margin. This was below our estimate of 477 MEUR, primarily due to lower revenue, higher social charges, and OpEx than expected.

…and a mixed Q3 guidance

Q3 guidance echoed the Q2 results, with stronger-than-expected user growth, but weaker financial headline figures. Revenue guidance of 4.2 BNEUR (6% y/y) was well below our and Street’s estimate of 4.6/4.5 BNEUR, largely due to large FX headwinds and softer pricing trends. Gross margin guidance of 31.1% also trailed our 31.7% forecast, indicating greater variability than anticipated. EBIT guidance of 485 MEUR similarly missed both our and Street's expectations. On the earnings call, Spotify reiterated its focus on maximizing user lifetime value (LTV) over short-term gains, highlighting strong user engagement and market positioning. The company also increased its existing share buyback program from 1 BNEUR to 2 BNEUR, with 1.9 BNEUR still authorized given minimal prior usage. Following the weaker-than-expected Q2 report as well as guidance, we have made downward revisions to our estimates. For 2025, we now estimate revenue growth of 10% to 17.3 BNEUR (was 14%, 17.9 BNEUR) with an EBIT of 2 BNEUR (11% margin, was 2.2 BNEUR).

No upside in sight over the next 12 months

Despite the post-earnings share price drop, we still view Spotify’s near-term valuation as elevated, with the stock trading at EV/EBIT of 53-37x, EV/FCFF of 42-30x, and EV/GP of 19-16x on our revised 2025-2026 estimates. However, the valuation becomes more attractive in 2027, where Spotify trades near the lower end of our acceptable range (EV/EBIT: 30x, EV/FCFF: 25x, EV/GP: 13x). While Spotify’s large subscription base offers some insulation from macroeconomic and geopolitical turmoil, we believe it is too early to turn bullish based on 2027+ metrics, especially given that the stock still trades at the high end of our acceptable multiples for 2026. That said, long-term fundamentals remain intact, and Spotify has, in our view, a long runway of growth left and years of margin expansion ahead, where pricing will play a larger role. That said, we believe much of this upside is already reflected in the current valuation, and the near-term risk/reward remains unattractive at this stage.