Global Data Privacy Pressures And Licensing Costs Will Constrain Value

Key Takeaways

• Escalating regulatory scrutiny, rising content costs, and worsening consumer budgets threaten Spotify's margins, advertising revenue, and subscription growth.
  
• Heavy bets on podcasts and new content verticals face execution risks, while market saturation and direct artist platforms jeopardize Spotify's long-term earnings stability.
  
• Diverse content expansion, strong emerging market growth, and product innovation are driving higher user engagement, operational efficiency, and sustained improvements in revenue and profitability.

Catalysts

Provides audio streaming subscription services worldwide.

• As global regulatory scrutiny intensifies, particularly around data privacy and content moderation, Spotify is likely to face rising compliance costs and tighter restrictions in user data utilization, which will directly limit the effectiveness of its personalization algorithms and may cap future advertising revenue growth while also weighing down net margins.
  
• With economic inequality worsening and consumer discretionary budgets under strain, there is a heightened risk that users will cut back on non-essential spending, resulting in higher churn rates for Spotify's subscription business; this challenges long-term average revenue per user growth and dampens the company's ability to maintain robust earnings momentum.
  
• Spotify's persistent reliance on major record labels for music licensing, combined with the increasing bargaining power of these rights holders, is expected to drive up royalty and content acquisition costs over time, constraining gross margin expansion and jeopardizing net margins well into the future.
  
• The company's investment in podcasting, video, and audiobooks comes with significant execution risk; if these adjacent content verticals fail to yield distinct revenue streams or meaningful ad monetization, Spotify could see long-term earnings growth stall, resulting in subpar returns on invested capital and stagnant free cash flow.
  
• In mature markets, Spotify faces the dual headwinds of market saturation and the emergence of direct artist-to-fan platforms, which threaten to erode its negotiating leverage, intensify downward pricing pressure, compress ARPU, and create less predictable revenue streams, all of which threaten the platform's long-term financial stability.

Spotify Technology Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Spotify Technology compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Spotify Technology's revenue will grow by 12.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 7.2% today to 12.9% in 3 years time.
• The bearish analysts expect earnings to reach €3.0 billion (and earnings per share of €13.05) by about July 2028, up from €1.2 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 41.5x on those 2028 earnings, down from 101.1x today. This future PE is greater than the current PE for the US Entertainment industry at 26.9x.
• Analysts expect the number of shares outstanding to grow by 2.12% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.5%, as per the Simply Wall St company report.

Spotify Technology Future Earnings Per Share Growth

Risks

• Spotify continues to experience strong global user and subscriber growth, particularly in emerging markets such as Latin America and Asia Pacific, which is likely to drive long-term revenue expansion and increased market share.
  
• The company is successfully diversifying beyond music into high-engagement content verticals like podcasts, audiobooks, and video, enhancing user engagement, retention, and providing multiple new avenues for revenue and margin improvement over time.
  
• Spotify has demonstrated the ability to improve ARPU through effective price increases, segmentation of product tiers, and maintaining high value-to-price perception, all of which have contributed to gross margin expansion and growing operating income.
  
• The advertising business is seeing robust demand growth, driven by new programmatic and self-serve tools, as well as a rapid increase in active advertisers, which supports a growing and resilient ad-supported revenue stream.
  
• Significant investments in AI, product innovation, and platform scalability are accelerating feature deployment and operational efficiency, which is expected to further reduce costs and increase both revenue and net margin over the long term.

Valuation

• The assumed bearish price target for Spotify Technology is $524.19, which represents two standard deviations below the consensus price target of $748.48. This valuation is based on what can be assumed as the expectations of Spotify Technology's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $911.19, and the most bearish reporting a price target of just $470.35.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €23.2 billion, earnings will come to €3.0 billion, and it would be trading on a PE ratio of 41.5x, assuming you use a discount rate of 8.5%.
• Given the current share price of $674.46, the bearish analyst price target of $524.19 is 28.7% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.