SPOT: Upcoming Price Increases And Product Changes Will Drive Future Upside

Key Takeaways

• Expanding into new content verticals and enhanced personalization are increasing user engagement, reducing churn, and supporting higher revenue per user and improved margins.
  
• Investments in ad technology, generative AI, and diversified monetization models position Spotify for accelerated growth and expanded earnings across multiple channels.
  
• High dependence on costly music licensing, slow ad revenue growth, uncertain podcast profitability, tough competition, and regulatory risks threaten margin expansion and long-term earnings.

Catalysts

Provides audio streaming subscription services worldwide.

• Rapid global user and subscriber growth, supported by increasing internet connectivity and smartphone penetration, is expanding Spotify's total addressable market and lays the foundation for continued double-digit top-line revenue growth in coming years.
  
• Major investments and advances in generative AI and personalization-including new interactive DJ features, conversational playlists, and improved engagement tracking-are driving longer user sessions and stickier product experiences, reducing churn and likely contributing to higher lifetime value and net margins over time.
  
• Enhanced ad technology, automation, and a growing monthly active advertiser base (up 40% YoY) position the company for accelerated advertising revenue growth from both programmatic and direct channels in 2026 and beyond, with the potential for margin expansion as ad monetization increases.
  
• Ongoing product innovation and diversification into fast-growing verticals-such as podcasts, video, and audiobooks-expands revenue per user, supports higher ARPU, and improves operating leverage, especially as these formats experience exponential engagement increases (e.g., video podcasts up 20x vs. audio).
  
• Product and platform changes, including new a la carte transactional offerings and improved in-app payment flows (post-Apple/DMA changes), provide future optionality for additional high-margin revenue streams that could materially boost both gross margin and overall earnings growth.

Spotify Technology Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Spotify Technology's revenue will grow by 13.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.9% today to 16.3% in 3 years time.
• Analysts expect earnings to reach €4.1 billion (and earnings per share of €19.73) by about April 2029, up from €2.2 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as €4.6 billion.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 36.0x on those 2029 earnings, down from 40.4x today. This future PE is lower than the current PE for the US Entertainment industry at 37.3x.
• Analysts expect the number of shares outstanding to grow by 0.38% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.66%, as per the Simply Wall St company report.

Risks

• Spotify's ongoing dependence on major record labels for music licensing maintains high content costs and limits gross margin expansion, risking long-term profitability and net margins.
  
• Scaling the podcast and audiobook verticals into meaningfully profitable and diversified revenue streams remains an uncertainty, with current investment outpacing near-term returns, possibly compressing operating margins and earnings growth.
  
• Advertising revenue growth remains slow, hindered by execution challenges and underperformance relative to competitors, which could limit future margin expansion and revenue diversification.
  
• Intensifying competition from global tech giants offering bundled services (such as Apple, Amazon, and YouTube) may pressure user growth, market share, and pricing power, impacting revenues and long-term earnings potential.
  
• Persistent regulatory, data privacy, and platform-related uncertainties (e.g., challenges with Apple/iOS, evolving global privacy laws) could constrain Spotify's ability to personalize user experience and monetize through advertising, risking both user engagement and ad revenue streams.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $647.43 for Spotify Technology based on their expectations of its future earnings growth, profit margins and other risk factors.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $806.42, and the most bearish reporting a price target of just $417.42.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be €24.9 billion, earnings will come to €4.1 billion, and it would be trading on a PE ratio of 36.0x, assuming you use a discount rate of 8.7%.
• Given the current share price of $511.36, the analyst price target of $647.43 is 21.0% 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.