Spotify's 25% Upside: If User Growth and Margins Keep This Simple Play Working

Expectations are higher now, so the upside depends on execution

Spotify still offers about 25% upside, but this is no longer a hidden idea. With a Moderate Buy consensus and an average price target of $629.73 versus a current price of $501.45, Wall Street still sees meaningful upside. The question now is whether the company can keep delivering the proof points behind that view.

Morgan Stanley's reset makes the debate clearer

That is the real bull-bear split. Bulls can still point to a business people use every day, and even Morgan Stanley's more conservative stance still leaves room for upside. The firm cut its target to $650 from $775, but it kept an Overweight rating and said gross margin expansion remains on track. In other words, expectations were reset, not the thesis.

Because the stock is no longer priced like an obscure winner, the upside case now depends on user growth turning into cleaner revenue and better profits. If that keeps happening, the re-rating case still works. If the numbers stay muddier, a popular app may not be enough.

User growth is still there, and engagement looks more durable

After the expectations reset, the basic test is simple: are people using Spotify more, and is the business improving as a result? So far, the evidence still leans positive.

Q1 results passed the demand test

Spotify's latest quarter looked grounded, not forced. Management said Q1 results were in line or slightly ahead of expectations across all key metrics. It also said it surpassed 760 million monthly active users, while the results release showed 761 million MAUs, up 12% year over year. Most importantly, it added 3 million Premium subscribers to reach 293 million even after U.S. price hikes.

Price increases are usually where weaker demand shows up first. If interest were fading, conversion would slip and churn would rise. This quarter, the heavier lifting still came from real usage and solid conversion.

Personalization is the product-side lever

Management also said that since the rollout of a more personalized free experience, users in key markets such as the U.S. are listening and watching more days per month. That matters because more engagement gives Spotify more chances to monetize through ads and to make the Premium upgrade feel more valuable.

At Investor Day, management said the platform is fueled by 3.4 trillion daily taste signals. That gives Spotify a large record of what people actually listen to. If that data keeps improving recommendations and related products, the service should become more useful over time, which can support ads, subscriptions, and retention.

The key question is whether usage is improving economics

Demand was only part of the story. The bigger test is whether more listeners in the app are translating into better margins, not just a larger scale of content costs.

Gross margin expansion is the signal investors want

Spotify posted Q1 revenue of €4.53 billion, up 8%, while gross margin improved to 33.0% from 31.6%. Management said the gain came because revenue growth was outpacing costs for music, audiobooks, and video podcasts. That is the mechanism bulls want to see: more usage helps only if it does not bring an equal cost increase with it.

Paid is still doing the heavy lifting, but ads are not the weak link

The split between paid and ads helps explain the margin move. Premium revenue rose 10% reported and 15% in constant currency, while ad-supported revenue fell 5% reported but rose 3% in constant currency. The paid base is still driving the business, but advertising did improve once foreign-exchange effects were removed, helped by growth in impressions sold and sponsorship gains.

That distinction matters. Ads are where more engagement can turn into more monetization without adding much incremental content cost.

Content costs are still the main pressure point

The bear case is not hard to see. Even in a strong quarter, Spotify said it paid the music industry $11 billion in 2025, up about 10%. If royalty costs keep rising quickly, more listening time does not automatically mean much more profit.

Still, the latest quarter improved the case that Spotify is becoming more than a product story. Operating income reached €715 million, up 40%, and free cash flow rose to €824 million, up 54%. If Premium growth and ad monetization stay ahead of content-cost growth, the stock can still earn further upside from here.

What keeps the bull case intact from here?

Investors do not need another vision pitch. They need to see the same funnel keep working.

The bull checklist

• User growth has to keep feeding the business. Recent results showed the funnel was still operating, with 761 million monthly active users and 3 million Premium subscribers added even after U.S. price hikes.
• Revenue mix needs to stay favorable. The clean path is steady Premium growth plus enough ad improvement to monetize engagement without a proportionally larger content bill.
• Margins have to keep improving. The latest quarter delivered 33.0% gross margin because revenue growth was outpacing costs for music, audiobooks, and video podcasts. That is the most important part of the story from here.

What would weaken the thesis

Bears do not need a disaster to be right. They just need usage to rise while monetization lags, or for operating leverage to fade before it is fully proven. Operating margins were perhaps the only area lower than expectations, so that remains the pressure point.

The clearest warning signs are:

• MAU or Premium adds cool off
• Premium revenue stops outgrowing content costs
• Gross margin improvement stalls after the move from 31.6% to 33.0%

So the why-now is simple: at a current price of $501.45 and an average price target of $629.73, the case works only if demand keeps turning into better sales quality and sharper margins. A great app helps, but it is not enough on its own.