Spotify’s (SPOT) strong bullish run paused last month, with the pullback extending after its Q3 earnings call. In my view, the decline was primarily driven by broad profit-taking across the tech sector—particularly in stocks like SPOT, which had already gained more than 60% through September—and by some concerns over the ad-supported segment, where average revenue per user (ARPU) was weaker than analysts expected.
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However, I see this more as a mix-shift effect tied to strategic reclassification rather than a sign of structural weakness or increasing churn. In other words, the market’s response seemed like an overreaction to results and guidance that, in my opinion, remain consistent with Spotify’s long-term bullish setup.
The most important piece of the puzzle for SHOP—margin expansion—remains firmly intact. And that’s the core of the “platform transition” thesis, which continues to unlock upside in the model. With that in mind, I maintain a Buy rating on Spotify.
Margin Expansion Fuels the Bullish SPOT Narrative
Much of Spotify’s bullish trajectory over the past year can be attributed to its transformation from a low-margin music reseller into a multi-layered audio platform, which effectively expands margins and gains recurring pricing power alongside growing ad monetization.
At the heart of this transformation is gross margin expansion. Given that music margins are capped by record labels, Spotify needs to extract more value from products such as podcasts, audiobooks, ad tech, and other services. I believe the recent Q3 results reinforced a new structural margin level. For years, Spotify’s gross margins remained stuck between 24–28%, as record labels and publishers controlled most of the revenue share, while podcasts and marketplace products were not yet contributing.
In Q3, Spotify posted gross margins of 31.6%, surpassing management’s guidance of 31.1%, and projected an even stronger 32.9% for Q4. A closer look at the details reveals that premium gross margins dipped slightly year-over-year (down 34 basis points), but for positive reasons—mainly due to the reclassification of video podcasts and audiobooks—rather than any margin pressure from record labels or user churn. In other words, the decline reflects deliberate mix investment, not underlying deterioration.
However, the key upside in the thesis may lie in the rapidly expanding ad-supported gross margin, which reached 18.4%, representing a 525 bps YoY increase. Importantly, this improvement did not come from ads alone. It also reflects podcasts contributing positively for the first time and the marketplace paying for exposure within the platform. This is where the long-term leverage lies: as ad-supported margins continue to expand, Spotify increasingly takes on a “YouTube-style” role within the audio ecosystem.
A Structural Shift in Operating Margins
Another crucial point that reinforces Spotify’s bullish thesis is its operating leverage, which became even clearer in Q3 and Q4. The company grew revenue by 7% YoY to €4,272 million, while operating expenses declined by 2% YoY to €769 million.
This drove operating margins to 13.6% (a very meaningful level for streaming), compared to 11.4% in the same quarter last year—and just five quarters ago, operating margins were closer to 6%. In my view, this improvement is concrete evidence that Spotify has entered a phase of structural operating margin expansion, which is a key trigger for re-rating.
The same trend shows up in cash flow, where Spotify reported €806 million in Q3, up 13% YoY, and now holds €9.1 billion in total cash. This supports a market view of Spotify as a profit compounder rather than a cash-burning growth story.
Valuing Spotify Through Margins
When looking at SPOT from a valuation perspective, the thesis today is primarily about margin expansion. Because of that, the multiple that best captures the current stage of the business is EV/Gross Profit—not EV/Sales, and definitely not price-to-earnings, which remains distorted by content amortization.
Given Spotify’s current enterprise value of ~$122.3 billion, gross margins of 31.6%, and a revenue run-rate (Q3 2025) of €4.272 billion per quarter (around €17.1 billion per year, or ~$18.6 billion), this implies that SPOT is trading at roughly 21x gross profit. In my view, this premium multiple reflects the market’s partial recognition of Spotify’s “transition to platform”—but not yet valuing it like a mature platform. For context, Netflix (NFLX) trades at ~23x EV/Gross Profit, with a more established and fully established model.
If gross margin expands into the 33–36% range over the next one to two years (a plausible scenario), annual gross profit could rise to $6.3–$6.7 billion. That would imply an enterprise value of ~$133–$141 billion without any re-rating—or roughly 9% to 15% upside from current levels.
The bull case is that the market eventually reclassifies Spotify as an advertising-leveraged audio platform, similar to YouTube or Meta Ads. Under that framework, if the EV/Gross Profit multiple expands to around 27x, the implied enterprise value rises to roughly $171–$181 billion, representing 40% to 48% upside.
Is Spotify a Buy, Hold, or Sell?
The Wall Street consensus on Spotify remains quite bullish. Over the last three months, 22 of 28 analyst ratings have been Buy, with the remaining six at Hold. SPOT’s average stock target price is currently $782, implying roughly 22% upside over the coming year.
Why Spotify’s Re-Rating Still Has Room to Run
From a margin perspective, Spotify’s Q3 results showed that the company has reached a structural inflection point. Premium remains resilient, while the ad-supported segment (podcasts, marketplace, and advertising automation) is now beginning to deliver real margin leverage. In my view, the recent revenue softness is not structural but rather tied to mix improvements.
With disciplined OpEx and growing free cash flow, Spotify continues to transition from a music retailer into a scalable, multi-layered audio platform. I believe this shift will likely support a re-rating over time. For that reason, I remain constructive on the thesis, and a Buy rating remains appropriate.