Spotify Technology

Spotify's second-quarter sales and monthly active user additions were mildly disappointing, but margin expansion continued. Importantly, several new features announced at the recent Investor Day have not yet substantially contributed but are now rolling out and will provide a boost to future sales.

Why it matters: We expect the pace of subscriber additions to slow, considering streaming platform maturity in developed markets. Spotify's new features should help it maintain material revenue growth per subscriber despite a less favorable geographic subscriber mix. Personal podcasts, for which premium subscribers can buy additional credits beyond allotments, launched in June. Fitness Running Mode (launched in July) and Audiobooks+ (launching soon) require additional fees for subscribers to access. The firm does not have a timeline for when it will roll out its AI remixes and covers feature, which will also require a higher level of subscriber access. Merlin, which represents independent artists, has now joined Universal in licensing its songs for this feature.

The bottom line: With little change to our outlook, we maintain our $560 fair value estimate. Spotify has strengthened its narrow moat rating, in our view, through other new features—like its reserved ticketing program and integrating music experiences among friends—that may not lead to incremental revenue but make the platform more attractive and stickier.

Key stats: Total sales rose 14% year over year, while the gross margin expanded by nearly 2 percentage points. The firm's operating margin expanded by nearly 4 percentage points year over year but was down sequentially. As it had previously shared, Spotify is taking on heightened marketing and AI-related costs this year. We expect these to moderate but, especially for AI costs, persist. Still, they give management the ability to balance margin expansion and growth, and we expect margins to continue marching higher.

Advertising revenue rose 1% year over year after four straight quarters of declines. The firm has been revamping its advertising business and said it would improve by the second half, and this goal appears on track. Part of the improvement comes from serving more ads in emerging markets, which contributed to the slight disappointment in net monthly active user additions—16 million in the quarter. However, we suspect that ad-supported emerging markets users contribute only $0.10-$0.20 per subscriber per month, so adjusting the strategy is necessary and well worth a small bump in users leaving the platform.

We expect better targeting and a better sales solution in developed markets, in addition to the higher emerging ad-market ad loads, to leave a long runway to increase advertising sales per user. We also expect some users will transition to becoming paid subscribers rather than leaving the platform completely, making them much more valuable. The firm's 7,000 paid subscriber net additions came in slightly ahead of its guidance. Revenue per global subscriber rose 6% year over year, to $4.89.

Our fair value estimate for Spotify is $560, based on the Aug. 4, 2026 exchange rate of $1.15/EUR. Because Spotify’s stock trades in US dollars despite the firm reporting in euros, a weakening US dollar buoys Spotify’s stock value and can more than offset the negative impact the weak dollar has on financial results. Our fair value estimate implies a P/E ratio of 34 and an EV/EBITDA multiple of 25 based on our 2027 forecast. We project Spotify to average double-digit top-line growth throughout our 10-year forecast while growing profits and free cash flow at an even higher clip.

We project premium revenue growth (from subscriptions) to grow at a low-teens rate through 2030, beyond which we expect high-single-digit average growth. We expect subscriber additions to remain high and for the firm to regularly increase prices. We expect a greater proportion of subscriber additions to come from lower-priced markets over time, but we believe the firm still has multiple levers to drive revenue per subscriber higher, notably through price increases, introducing higher-priced tiers, and offering other subscription add ons, like Audiobooks+. We believe there are further penetration gains to make in the US and some other European countries that carry relatively higher prices, but we think the opportunity pales compared with what’s achievable in more developing markets. While we expect Spotify to maintain its leading market share, we don’t expect it to take further share from its major competitors, which primarily are major technology companies like Apple, Amazon, and Alphabet. As long as those companies remain in the music business, we think their subscribers will be sticky due to ecosystem preferences. In all, we project Spotify to add an average of almost 25 million global subscribers annually through 2028, but we project average revenue per subscriber to grow only 4% on average despite continuing price increases.

We expect premium revenue to continue making up nearly 90% of total revenue, as we believe subscription plans and other add-on features will continue to be the most appealing to consumers. However, we believe ad-supported revenue can also grow by double digits throughout our forecast, with higher advertising rates through better targeting and monetization of Spotify podcasts on other platforms contributing to the growth.

We expect margin expansion to come mostly from the firm continuing to realize operating leverage on its research and development and sales and marketing expenses. We see less opportunity for gross margin expansion because we don’t anticipate a significant change to the roughly 65% of music revenue that Spotify pays to major record labels and artists. However, there’s an opportunity for gross margin expansion in audiobooks and podcasts, even as music margin potential is limited. In total, we project gross margin to expand from 32% in 2025 to 37% in 2030—when further progress slows—while we project the operating margin to expand from 14.5% in 2024 to 20% by 2031. We expect free cash flow growth to mirror profits and average high teens annual growth throughout our forecast.

We assign Spotify a Morningstar Economic Moat Rating of narrow. In our view, the characteristics that make it difficult for a streaming music platform to gain a competitive advantage support the reason that Spotify, the clear current leader in the music streaming industry, has a moat and is unlikely to face a serious threat from competitors over the next several years. For Spotify, we see modest cost advantages, switching costs, and network effects. While no single moat source is a sufficient barrier to competitive pressure, together they make it unlikely that a competitor can eat into the leading global market share Spotify has attained.

Streaming music platforms don’t lend themselves to strong competitive advantages, because they largely offer the exact same product for the same price. Major record labels, who control most of the product, hold the most power in the music industry. The lack of negotiating leverage that results from the power disparity leaves music streaming platforms, also known as digital service providers, or DSPs, with limited flexibility in their cost structures and in how they price their offerings. Consequently, the major competitors can’t offer much differentiation in music catalog or pricing, leaving consumers with a similar value proposition from multiple providers.

The same lack of differentiation that commoditizes the experience, however, makes it very difficult for a competitor to siphon customers from an incumbent. We don’t believe there are any switching costs or network effects that are severe enough to prevent any customer switching from one provider to another, but modest switching costs do exist, notably the inconvenience in transferring playlists, learning a new platform, and giving up the ability to share playlists and track friends’ music habits.

We don’t think it’s possible to offer a materially different music experience than what Spotify does, leaving competitors the task of pulling away subscribers without having a superior offering. In other words, although switching costs might not be overly burdensome, the benefit of switching is nil in many cases, as competitors can’t realistically undercut other platforms on price if they ever hope to make a profit. Spotify is now firmly profitable after a long history of losses, and Spotify had the advantage of offering record labels something that no one else did when it launched—the ability to offer music fans sanctioned access to an entire catalog of songs over the internet.

Universally, DSPs generally pay a precise percentage of music subscription revenue to the record labels and artists, but they are subject to a per-subscriber minimum payment. DSPs pay at least 50%-55% of their music revenue to major record labels and another 15% to music publishers for access to the tracks consumed on their platforms. As a result, no platform can gain further operating leverage on its music costs under the current model.

This is where Spotify’s cost advantage begins to show. With no ability to drive down music costs and minimal opportunity to realize lower costs for the technological and infrastructure capabilities needed to operate a top-quality global platform, a music platform needs to spread its fixed costs over the largest possible user base to have a cost advantage. With more than 750 million users, including nearly 300 million premium subscribers, Spotify is the global leader.

We also think a music streamer of Spotify’s scale and maturity has a lower need for marketing costs than less-established competitors. Spotify has already reached a critical mass of subscribers and is the clear leader in its industry, meaning that, for the most part, it no longer needs to raise awareness of its service or engage in creative marketing to attract customers.

These industry barriers protect Spotify against the biggest current competitors as well as prospective competitors. Outside of China, where Tencent Music is the industry leader, Spotify’s biggest competitors are Apple Music, YouTube Music, and Amazon Music. Each of these streaming services is part of a gigantic technology conglomerate, and in some cases, these firms may be less concerned about making music profitable than driving users into their ecosystems. Yet even these companies have not been able to dent Spotify’s subscriber growth, and they all still have much smaller subscriber bases despite launching in the mid-2010s. From a usage perspective, their offerings cannot provide any compelling features that Spotify does not, and from a financial perspective, they too are limited in their ability to offer users better prices or value than they do now. Spotify has thrived in this competitive environment, and we don’t think these competitors can do much to change the current market share. We expect record labels to resist efforts by large tech firms to add more “extras” to bundled plans without a corresponding price increase.

We see the same outcome with smaller competitors. Pandora, which is part of SiriusXM, offers essentially the same service as Spotify. However, SiriusXM does not seem to aggressively push its Pandora business, instead focusing on the SiriusXM offering. We perceive that Pandora accepts that it would be fighting a losing, value-destructive battle to aggressively go after Spotify customers.

Spotify has significant room to continue raising prices after historically not doing so. The value is higher and the price is lower for a Spotify subscription than nearly all video streaming services.

Music streaming penetration in many countries is quite low, both in absolute terms and relative to uptake for video streaming services. This provides a long runway for further subscriber growth.

Advertising is a nascent area of growth. Both targeting and inventory should improve, with Spotify now including video podcasts on its own platform and audio podcasts across all platforms.

The rise of AI music creation may democratize access to music and reduce reliance on licensing deals with record labels, allowing native AI platforms to take share from traditional music platforms.

Spotify relies on record labels and owns little proprietary content. Over the long term, record labels’ power caps profitability and could threaten the ability to expand margins.

Spotify’s biggest competitors are technology companies that don’t rely on music for profits. Integration in their ecosystems and bundles with other services could make their platforms more attractive than Spotify.