Spotify Q2'25 preview: No room for disappointments

Spotify reports Q2 earnings on Tuesday, July 29, before the market opens. We expect the business to continue to show resilience amid continued macroeconomic and geopolitical uncertainty, supported by its high share of subscription revenue and compelling value-proposition. Ahead of the Q2 print, we have slightly lowered our top- and bottom-line estimates, primarily due to FX and social charges. We have also revisited our mid- to long-term estimates and identified overlooked long-term operating leverage in the business. As a result, we now take a more optimistic view of Spotify’s ability to scale revenue with a leaner cost base, which has positively impacted our fair value. Even so, the expected return over the next 12 months remains unattractive at current levels, with potential upside weighted toward 2027. As such, we reiterate our Reduce recommendation but increase our target price to USD 650 (was USD 570) due to estimate changes as well as the effects of a weaker USD versus EUR.

Modest MAU additions in the cards as 2025 will be back-loaded

After a rather subdued MAU growth in the first quarter (+3m), following a very strong Q4, we expect a +11m (q/q) net additions, bringing the total to 689m. In Q1, Spotify delivered a strong subscriber growth despite macroeconomic and geopolitical headwinds, underscoring the resilience of its business model and value proposition. We expect this momentum to continue in Q2 and have raised our subscriber estimate to 273m, (from 272m; Q2’24: 246m; Q1’25: 268m), as we also see upward pressure from iOS app rule changes in May that have boosted premium conversion, according to the company. In addition, we have slightly trimmed our Q2 ARPU estimates due to FX headwinds, and we expect revenue to land in line with guidance at 4.3 BNEUR (Q1’24: 3.8 BNEUR), marking a solid 13% year-on-year increase.

We are fine-tuning our long-term cost estimates

We revise our Q2 gross margin assumptions slightly down to 31.5% (from 31.7%), in line with guidance, to better reflect recent platform improvements (e.g. concert discovery, AI playlist) and expansions (video, new audiobook market launches). However, our FY25 gross margin estimates remain unchanged, as we expect stronger operating leverage during the rest of the year. Further down the P&L, we’re trimming our Q2 EBIT estimate by ~11% to 477 MEUR (prev. 533 MEUR), 5-13% below consensus and guidance, to incorporate incremental social charges (Inderes est: 105 MEUR). In this update, we have also revisited our mid- to long-term estimates, where we feel that we might have been too conservative on the operating leverage in the business. Specifically, we see the increased adoption and use of AI in the day-to-day operations enabling smarter, faster execution and stronger scaling effects on R&D expenses, as illustrated in the last couple of quarters. Against this backdrop, we have raised our mid- to long-term margin trajectory, which has positively impacted our estimated fair value.  

Priced to perfection, risk/reward remains unattractive

Even so, we still believe the near-term valuation remains too rich, with Spotify trading at EV/EBIT 54-40x, EV/FCFF 41-32x, and EV/GP 21-17x for 2025-2026e. We believe the overall valuation picture in 2027 (EV/EBIT: 32x, EV/FCFF: 28x, EV/GP: 14x), looks more neutral and aligns with the midpoint of our acceptable valuation ranges. While we believe subscription businesses with large user bases, such as Spotify, are rather insulated from current global turmoil, we think it is somewhat premature to turn bullish on the stock based on 2027 estimates and beyond, considering the current elevated valuation. Our DCF model, assuming sustained strong growth and margin expansion, supports our view on the valuation, indicating a fair value of USD 649. That said, the long-term fundamentals remain intact, and Spotify has, in our view, a long runway of growth left and years of margin expansion ahead, where pricing will play a larger role. However, we believe that much of this is already priced into the stock in the near term, and we view the risk/reward to be insufficient to turn bullish on the stock at this time.