Expanding Smartphone Penetration And AI Will Redefine Digital Streaming

Key Takeaways

• Accelerating AI innovation and evolving monetization strategies position Spotify for durable user and revenue growth, extending its lead through compounding engagement and new payment flows.
  
• Flexible global expansion and strong capital allocation create long-term scalability, with untapped upside in mature markets and robust support for investing in future initiatives.
  
• Margin expansion remains constrained by rising royalty costs, competitive pressures, regulatory risks, and the growing threat of artists bypassing Spotify through alternative distribution models.

Catalysts

Provides audio streaming subscription services worldwide.

• Analyst consensus is constructive on global subscriber growth, especially in emerging markets, but is likely underestimating the long-term impact of Spotify's targeted innovations and product expansion in mature markets, which management believes could drive adoption to 10 or even 15 percent of the world's population-unlocking multi-year upside in both top-line revenue and durable subscriber ARPU growth.
  
• Analysts broadly agree that multi-format content development and AI-driven innovation will help engagement and monetization, but they may be missing the speed and compounding effect of generative AI-enabled self-improving recommendation systems, which-given Spotify's unmatched engagement and data scale-could drive accelerating net margin expansion and uplift LTV far beyond expectations as models continually improve.
  
• As smartphone and internet adoption expands across the globe, Spotify's flexible product architecture and local content strategies enable it to rapidly scale into new geographies and device types, structurally increasing the total addressable market and enhancing the long-term revenue and user base trajectory.
  
• The platform's evolving monetization model, including anticipated a la carte transactions, localized tiering for superfans and bundled premium content, positions Spotify to diversify and grow ARPU through new payment flows, creative verticals (like education), and alternative monetization channels-opening up multiple future revenue streams and driving long-term earnings growth.
  
• Cumulative buyback capacity and robust free cash flow provide a powerful capital allocation advantage, allowing Spotify to opportunistically repurchase shares and aggressively invest in new growth initiatives while maintaining balance sheet optionality, which should enhance future EPS and support a premium multiple as operating leverage accelerates.

Spotify Technology Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Spotify Technology compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Spotify Technology's revenue will grow by 18.1% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 4.9% today to 16.5% in 3 years time.
• The bullish analysts expect earnings to reach €4.5 billion (and earnings per share of €21.22) by about August 2028, up from €806.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 48.5x on those 2028 earnings, down from 150.5x today. This future PE is greater than the current PE for the US Entertainment industry at 28.8x.
• Analysts expect the number of shares outstanding to grow by 2.47% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.48%, as per the Simply Wall St company report.

Spotify Technology Future Earnings Per Share Growth

Risks

• Persistent pressure from record labels and music publishers to raise royalty and licensing payments could constrain Spotify's gross margins and limit its ability to expand profitability over time.
  
• Stagnation or slower-than-expected growth in Spotify's ad-supported segment, driven by ongoing execution challenges and heightened competition, may cap net margin expansion and impact long-term earnings growth.
  
• The rise of competing platforms with cross-subsidization capabilities (such as Apple Music and YouTube Music), combined with increasing pricing competition, risks eroding Spotify's subscriber revenue and constraining future ARPU gains.
  
• Advances in generative AI music creation and artists' growing willingness to bypass platforms in favor of direct-to-consumer models could weaken Spotify's content exclusivity, diminish user engagement, and increase content acquisition costs, thus impacting revenue and net margins.
  
• Increasing regulatory scrutiny, including potential new digital content, privacy, or royalty regulations, may result in higher compliance and operational costs, putting further pressure on net margins and future operating income.

Valuation

• The assumed bullish price target for Spotify Technology is $903.33, which is the highest price target estimate amongst analysts. 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 bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $903.33, and the most bearish reporting a price target of just $481.78.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be €27.4 billion, earnings will come to €4.5 billion, and it would be trading on a PE ratio of 48.5x, assuming you use a discount rate of 8.5%.
  
• Given the current share price of $686.74, the bullish analyst price target of $903.33 is 24.0% higher.
  
• 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.