Is Spotify Technology SA a Buy After Its Latest Earnings Report?
The company's third quarter was marked by double-digit growth.
Spotify Technology SA (SPOT) experienced a surprising surge in stock price following its latest earnings report, defying expectations that investors would sell off the company's shares due to a drop in net income and missing consensus analyst estimates. The stock rose nearly 4% after the company reported a solid quarter, driven by robust revenue growth and a strong user base, while maintaining impressive profitability metrics.
Revenue for the quarter reached nearly €5 billion ($5.6 billion), with a 16% year-over-year increase, primarily driven by premium services, which grew by 17% to nearly €4.5 billion ($5 billion). Ad-supported offerings also saw a 10% rise to €482 million ($540 million). Spotify's total user base expanded by 11% to 788 million monthly active users (MAUs), with premium subscribers increasing by 9% to 306 million.
Attributable net income, however, fell to €518 million ($580 million) from the year-ago profit of €899 million ($1 billion), falling short of analyst expectations of €2.84 euros ($3.18) per share. This discrepancy was attributed to significant finance income from share, bond, and warrant valuations, as well as a tax benefit of €72 million ($81 million) during the quarter.
Despite the profitability concerns, Spotify exceeded its guidance for operating income, reaching €672 million ($753 million), and achieved a record gross margin of 33%. The company's strong free cash flow (FCF) of €735 million ($823 million) further bolstered investor confidence.
Spotify's management highlighted several growth opportunities, such as expanding its audiobook business to over 180 countries and leveraging artificial intelligence (AI) to offer more personalized and varied content to subscribers. Management expects modest growth in the current quarter, with 818 million MAUs and premium subscribers reaching 316 million, representing a nearly 9% increase over the same period in 2025.
With a forward P/E nearing 52, the company appears to be building a formidable moat, justifying its valuation despite the muted reaction from market participants. The Motley Fool believes that Spotify is an attractive investment opportunity, given its dominant position in the streaming music industry and its potential to capitalize on high-potential growth areas.
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