Spotify Q3'25: Executing well, but much of the upside is priced in

Spotify’s Q3 print came in above our top- and bottom-line estimates. Similarly, growth in the user base exceeded our forecast, driven by stronger development in ad-supported users. Q3 guidance was softer on revenue and subscriber growth relative to our and consensus estimates, while the profitability outlook was stronger than expected. Following the Q3 report, we have raised our MAU growth assumptions modestly, but lowered the subscriber base expectation somewhat. This, coupled with reduced advertising estimates due to pricing softness, weighed on our short-term revenue estimates slightly.  However, Spotify continues to show strong cost scalability, and we are increasingly optimistic about Spotify’s margin profile, which resulted in increased earnings estimates. At current share price levels, we feel that Spotify is fairly priced, leaving the risk-adjusted expected return insufficient at this point. We reiterate our Reduce recommendation but raise our target price on updated estimates to USD 655 (was USD 645).

Strong user growth and profitability development in Q3

Spotify net new MAU additions exceeded guidance as well as our estimate by +3m, while subscriber growth matched expectations. Pricing trends remained quite muted in Q3, as expected, as previous price increases were offset by FX headwinds and dilutive effects from strong subscriber growth in emerging markets. Revenue came in 0.9% higher than our estimate (4.24 BNEUR) at 4.27 BNEUR (7% y/y), driven by slightly higher premium ARPU than expected. Gross margin printed 31.6%, above guidance (31.1%) and our estimate, but the outperformance was largely driven by a one-time effect due to an accounting adjustment*.  EBIT amounted to 582 MEUR (Q3’24: 454 MEUR), corresponding to a 13.6% margin. This was above our estimate of 503 MEUR, primarily due to lower social charges and OpEx than expected.

Q4 guidance implied continued strong user intake

Q4 guidance was solid overall, but had its puts and takes in our view. While the MAU and profitability outlook came in above our and consensus estimates, revenue growth and subscriber growth fell slightly short. Revenue guidance of 4.5 BNEUR (7% y/y) was below our and Street’s estimate of 4.6 BNEUR, primarily due to larger anticipated FX headwinds, somewhat softer pricing trends in FX-neutral ARPU, and lower subscriber growth. However, gross margin and EBIT guidance (32.9% / 620 MEUR) both exceeded our and Street’s estimate. On the earnings call, Spotify reiterated its focus on maximizing user lifetime value (LTV) rather than short-term gains and highlighted that rapid product innovation, supported by AI-driven efficiency, continues to deepen engagement and drive strong user intake. In our view, these dynamics are key to sustain strong user growth and improving monetization, as higher engagement strengthens user loyalty, reduces churn risk, and improves pricing resilience. However, following the Q3 report and provided outlook, we lowered our revenue estimates slightly on lower subscriber growth and advertising revenue, while we raised our margin assumptions to reflect our more constructive stance on Spotify’s ability to continue executing in a more cost-disciplined and efficient way.

Risk/reward remains insufficient over the next 12 months

Following recent weeks’ share price softness and post-earnings drop, we view Spotify’s near-term valuation as neutral/on the high side, with the stock trading at EV/EBIT of 50-37x, EV/FCFF of 38-30x, and EV/GP of 19-16x on our revised 2025-2026 estimates. However, the overall valuation picture starts to look attractive in 2027, where Spotify trades below/at the low end of our acceptable range (EV/EBIT: 29x, EV/FCFF: 25x, EV/GP: 13x). However, with Spotify trading at the top of our acceptable valuation ranges on 2026e multiples, and our 2027e multiples already reflects high expectations of very strong execution, we believe it is somewhat premature to turn bullish on the stock as of now. That said, long-term fundamentals remain intact, and Spotify has, in our view, a long runway of growth and years of margin expansion ahead, where pricing will play a larger role. However, we believe much of this upside is already reflected in the current valuation, and the near-term risk/reward remains insufficient at this stage.