SPOT rallies despite rev miss; MAUs outpace expectations
2min read Spotify (SPOT) reported its third-quarter earnings, delivering mixed results that still propelled the stock over 8% as investors focused on subscriber growth over the revenue shortfall. Spotify reported an earnings per share (EPS) figure that beat analyst estimates, while revenue grew 19% year-over-year to €3.99 billion but fell short of the €4.03 billion consensus. Despite this revenue miss, the stock surged as Spotify’s Monthly Active Users (MAU) and Premium subscribers both exceeded expectations, which overshadowed the revenue shortfall and reinforced confidence in Spotify’s growth strategy.
Monthly Active Users (MAU), a critical metric for Spotify, rose to 640 million, beating analyst expectations of 639 million, while Premium subscribers totaled 252 million, ahead of the estimated 250 million. These figures indicate continued growth in Spotify’s user base, demonstrating strong engagement despite market challenges, particularly in digital advertising. Analysts attributed the positive market reaction to these subscriber numbers, which suggest that Spotify is solidifying its position as a leader in music streaming.
Spotify's gross margin also impressed, coming in at a record 31.1%, which exceeded the 30.2% expected by analysts. The Premium segment's gross margin was particularly strong at 33.5%, outperforming consensus estimates of 32.2%. This margin strength underscores Spotify’s efficiency improvements and effective cost management, and it provides optimism for continued profitability growth. However, advertising revenue remains a weak point, missing expectations as the digital ad market continues to face challenges.
The platform’s operational focus remains on product innovation, which has driven user engagement and contributed to strong subscription numbers. New features such as the AI DJ and music video offerings have resonated with users, enhancing the product experience and supporting Spotify’s subscriber base expansion. Additionally, Spotify’s management underscored its commitment to maintaining operational discipline, a strategy that has resonated with investors looking for sustainable growth.
Spotify provided guidance for the fourth quarter, forecasting revenue of €4.1 billion, slightly below the market’s €4.26 billion expectation, and operating income of €481 million, which exceeded expectations of €445.7 million. Management expects to add around 8 million new Premium subscribers in Q4, bringing the total to an estimated 260 million, signaling continued growth in paid subscriptions despite broader market headwinds. This forecast for increased subscriber growth suggests Spotify's confidence in its pricing and tiering strategies, which aim to maximize revenue per user.
A key driver behind Spotify’s robust margin performance was its evolving product mix and improved label partnerships, both of which support the Premium segment’s profitability. While advertising revenue lagged, Spotify expects incremental monetization opportunities, such as the anticipated Super Premium tier and enhanced programmatic ad capabilities, to boost revenue growth over the longer term. The company remains optimistic about margin expansion in 2025 and beyond, with potential tailwinds from continued product rollouts and refined cost structures.
Spotify’s partnership with labels and its disciplined approach to expanding content offerings highlight its strategy for long-term success. With a cash reserve exceeding €6 billion, the company has capital allocation flexibility for strategic investments and potential share buybacks, further enhancing shareholder value. Analysts note that Spotify’s focus on both subscriber growth and profitability positions it well as a high-growth tech stock with a resilient business model.
In summary, Spotify’s Q3 results highlight strong subscriber growth and margin expansion, while revenue growth remains a concern. The bull case sees Spotify benefiting from sustained subscription growth and improved margins through innovation and strategic partnerships, supporting a valuation upside to $640. The bear case focuses on revenue risks from increased competition and industry shifts, with a downside to $290. The neutral perspective recognizes Spotify’s potential to stabilize and grow margins, positioning it as a solid performer in the digital streaming landscape with an estimated price target of $520.