Spotify's Struggling Ad Business and Its Material Impact on Long-Term Valuation

Spotify's advertising revenue has become a growing concern for investors, even as the company continues to post strong overall financial results. In Q3 2025, ad-supported revenue fell 6% year-over-year to €446 million, missing analyst expectations of €467.7 million. This decline, attributed to currency headwinds and a challenging advertising environment, has sparked debates about whether Spotify's long-term growth narrative remains intact. While the company's premium subscription model and user base expansion have driven total revenue to €4.3 billion in the quarter, the ad business's underperformance raises critical questions about its role in sustaining Spotify's valuation.

Ad Revenue Challenges and Strategic Adjustments

Spotify's advertising segment has faced persistent headwinds. The 6% decline in Q3 2025 marks a sharp contrast to the company's broader financial momentum, which includes a 12% year-over-year revenue increase and 281 million premium subscribers. CFO Christian Luiga acknowledged that 2025 is a transitional year for the ad business, with recovery expected in the second half of 2026 as programmatic ad buying scales. This shift to automated, data-driven ad sales is critical for improving efficiency and attracting new advertisers, but its delayed impact has left investors wary.

The free tier, which remains a key driver of user growth, has expanded to 446 million users, yet monetizing this audience has proven elusive. Ad-supported revenue has stagnated, with Q3 2025 results showing no growth on a constant currency basis. This stagnation contrasts with Spotify's AI-driven innovations and product diversification, which have boosted engagement metrics-such as 32.3 hours per month spent by U.S. users. However, the company's reliance on converting free users to paid subscribers, rather than ad revenue, has reduced the immediate urgency to fix the advertising slump.

Analyst Projections and Valuation Concerns

Analysts remain divided on Spotify's stock potential. Optimistic voices, like Benchmark, have raised price targets to $860, citing confidence in Spotify's pricing power and product innovation. Conversely, Goldman Sachs has trimmed its targets, reflecting skepticism about the ad business's recovery. These divergent views highlight the uncertainty surrounding Spotify's ability to balance its dual monetization strategies: premium subscriptions and advertising.

The company's valuation also remains a contentious issue. Trading at a forward P/E of 45.3 for 2026 estimates, Spotify's price-to-sales ratio is significantly higher than industry averages. While strong revenue growth and a loyal user base justify some premium, the ad business's struggles could limit upside potential if earnings fail to meet expectations. Bearish analysts warn that rising content costs and an already-elevated valuation could amplify downside risks in the near term.

The Path Forward: Price Hikes and Programmatic Transition

Spotify's strategic roadmap for 2026 includes a U.S. price hike, its first since 2024, driven by pressure from record labels and inflationary pressures. This move, combined with AI-driven efficiency gains, is expected to bolster margins and offset some ad-related weaknesses. However, the success of these initiatives hinges on the free tier's continued growth and the eventual scaling of programmatic ad sales.

The transition to programmatic buying, while promising, is a long-term play. Spotify anticipates meaningful improvements by late 2026, but the current ad slump has already prompted investors to recalibrate expectations. For now, the company's growth narrative appears resilient, underpinned by premium subscriber expansion and product innovation. Yet, the ad business's underperformance serves as a reminder that Spotify's valuation is not immune to sector-specific challenges.

Conclusion

Spotify's advertising struggles are a material headwind, but they do not necessarily invalidate its long-term growth story. The company's ability to pivot toward programmatic ad sales and leverage its free tier for user acquisition provides a buffer against immediate risks. However, investors must weigh the ad business's underperformance against Spotify's high valuation and content cost pressures. If the transition to programmatic buying accelerates as planned and the U.S. price hike delivers margin expansion, the stock could still justify its premium. For now, the path to sustained growth remains a delicate balancing act between innovation, monetization, and market expectations.