Spotify Q3 2025 Earnings: The Execution Engine Goes Live

From feature factory to AI-powered machine—Spotify’s execution engine is no longer hypothetical. It’s operational, profitable, and redefining the business.

TL;DR:

• Execution is now the moat. Spotify isn’t just building features—it’s built a scalable system that ships faster, cheaper, and better than competitors.

• AI is the cost weapon. From app development to platform expansion, AI now drives structural margin improvement across the company.

• Licensing strategy flipped. No longer just minimizing cost, Spotify now secures flexibility—fueling product innovation like video podcasts and Netflix integrations.

For years, Spotify’s business model seemed perpetually precarious—trapped between powerful music labels and massive tech competitors. Its path to sustainable profitability was theoretical, contingent on scale, advertising growth, and margin expansion that always felt just over the horizon.

That theory became fact this week.

Spotify’s Q3 2025 earnings delivered across every metric—713 million MAUs, €4.27 billion revenue, operating income of €582 million (beating guidance by 20%), and record €806 million quarterly free cash flow. But the real story runs deeper. This quarter provided definitive evidence that Spotify has finished building its product and is now perfecting its engine—a self-improving system achieving velocity and efficiency that fundamentally changes its trajectory.

The Three Strategic Unlocks

Unlock 1: Product Velocity as Competitive Moat

Spotify shipped over 30 new features in recent months—more than in all of the previous year. This isn’t about feature parity; it’s about systematically eliminating friction while building deeper engagement loops.

The enhanced free tier—first major update since 2018—is already driving MAU growth ahead of plan, contributing to 17 million net additions. Counterintuitively, improving the free tier doesn’t cannibalize Premium; it fine-tunes the intake valve of their conversion funnel, creating more engaged future subscribers who understand the full value proposition.

In-app messaging has already generated nearly 200 million messages to 25 million recipients. This isn’t just another feature—it’s a native social layer that transforms Spotify from solitary utility to connected platform. Every message sent increases switching costs organically.

The multi-format engagement strategy is quietly building momentum. Video podcast users hit 390 million (+54% YoY), audiobook listening hours grew 36%, and Jam reached 100 million monthly listening hours. Car listening now represents 34% of the entire MAU base at 245 million users.

What competitors cannot easily replicate is an entire organizational system optimized for shipping quality features at this velocity.

Unlock 2: AI as Operating System

The quarter’s most significant strategic revelation came from Co-President Gustav Söderström explaining how they built their new Apple TV app. Instead of costly from-scratch development, they leveraged AI to translate their iOS app to tvOS—drastically reducing cost and time.

This represents a profound shift. AI has evolved from powering recommendations to becoming the core of Spotify’s operations—a fundamental cost lever and productivity multiplier. The implications for cost structure and scalability are massive. Spotify’s ubiquity strategy (being on every device) has always been expensive. By using AI to automate this process, they can expand their footprint faster and cheaper than competitors.

Evidence is visible in the financials: operating expenses declined 2% YoY while revenue grew 12% on constant currency basis. That’s true operational leverage—more output for less input.

Unlock 3: Strategic Flexibility Through Licensing

The market has always viewed Spotify’s licensing deals as zero-sum negotiations to minimize crushing costs. CEO Daniel Ek and Co-President Alex Norström reframed this dynamic masterfully.

These new deals secure something more valuable than lower rates: flexibility. As Norström noted, agreements provide “broader video rights that we have long needed.” Spotify is trading predictable costs for unpredictable upside in product innovation. By securing broader permissions upfront, they can experiment with new formats without constant renegotiation.

This changes the power dynamic. Spotify is no longer just a distributor needing licenses; it’s a platform using licenses as raw material to build integrated experiences the labels cannot create. The Netflix partnership to bring Spotify’s video podcasts to their platform starting in 2026 exemplifies this—only possible because Spotify negotiated the flexibility.

The Execution Engine as System

These unlocks form a self-reinforcing system where each element amplifies the others:

• Strategic flexibility provides freedom to experiment with new formats

• AI-powered operations enable cheap, quick execution

• High-velocity innovation drives stronger user fundamentals

• Improved fundamentals make strategic flexibility more valuable

This is an execution engine—not just executing well on strategy, but an organizational system designed for speed, efficiency, and compounding returns. While competitors ship individual features, Spotify built a factory that produces features faster, better, and cheaper.

Regarding advertising (flat YoY at €446 million), management provided clear recovery timeline for H2 2026. They’re swapping an inefficient module (direct sales) for a scalable one (programmatic infrastructure). The new DSP partnerships with Amazon and Yahoo are tangible components of this rebuild.

Importantly, advertising has become strategically optional. Premium revenue represents 90% of total revenue, growing 13% on constant currency basis. Spotify posted record free cash flow without advertising growth. The subscription engine works standalone.

Financial Trajectory and Valuation

Wall Street consensus shows the market beginning to understand this shift:

• Revenue expected to accelerate to 15% growth in 2026

• Gross margins forecast to expand 200+ basis points to 34.3% by 2027

• EPS expected to grow 77% in 2026 alone

At ~$630 per share, Spotify trades at 48x estimated 2026 earnings. That seems expensive in isolation, but with 77% EPS growth expected, investors are paying for a steep profit inflection already underway.

More telling is price-to-FCF at ~33x estimated 2026 free cash flow. FCF is expected to reach €5.1 billion by 2028, nearly double current levels. If that materializes, today’s valuation will look reasonable.

The key question isn’t whether Spotify deserves a premium—it clearly does given structural advantages and execution velocity. The question is whether current price offers sufficient margin of safety. At 48x forward earnings, there’s little room for disappointment.

Thesis Evolution Since Q2

My Q2 analysis focused heavily on advertising transformation and dual-revenue platform dynamics. Q3 makes clear I was modeling the wrong business:

1. Advertising moved from core to optional: Q2 scenarios required ad revenue reaching 15-25% of total. Q3 proved the subscription business works independently. Advertising recovery is pure upside.

2. Free tier strategy inverted: I viewed it primarily as conversion funnel. The enhancement shows it’s now a land-grab tool for scale at 713 million users.

3. AI evolved from feature to operating system: I understood AI as powering recommendations. The Apple TV example shows AI is now the primary margin expansion driver through cost efficiency.

4. Valuation richer than estimated: Actual 48x vs. my 40x estimate. The 77% EPS growth justifies the premium, but execution must be flawless.

5. New risk emerged: The co-CEO structure with Ek transitioning to Executive Chairman January 1st introduces organizational complexity. Co-CEO structures are notoriously difficult when leaders have different priorities.

Investment Positioning: Priced for Perfection

We are circumspect not because the business is weak, but because current price demands flawless execution.

Bull case ($800-900, 25-40% upside):

• Enhanced free tier sustains MAU growth >12%

• Gross margins reach 36%+ by 2028

• Advertising recovers H1 2026

• AI efficiency exceeds expectations

• Multiple sustains at 50-55x given growth acceleration

Base case ($700-800, 10-25% upside):

• 77% EPS growth delivered in 2026

• Gross margins expand to 34-35%

• Co-CEO transition proceeds smoothly

• Advertising recovers late 2026 as guided

• Multiple sustains at 45-50x

Bear case ($450-550, 25-30% downside):

• MAU growth decelerates <8%

• Gross margins stall <33%

• Co-CEO structure creates execution drift

• Competition intensifies

• Multiple contracts to 30-35x

For new positions, wait for pullbacks to 38-42x 2026 earnings (~$520-570). For existing positions, trim if multiple expands >55x without fundamental acceleration.

What to Watch

Q4/Q1 Critical Metrics:

1. Free tier conversion timing: Should improve 2-3 quarters post-implementation. Q4 disappointment = temporary cannibalization. Weakness into Q2 2026 = broken funnel.

2. Q1 2026 gross margins: Expected seasonal decline, but magnitude matters. Below 31% = format mix improvements aren’t offsetting video costs.

3. 2025 Wrapped campaign: With enhanced free tier and multi-format content, potential for strongest acquisition event in company history.

4. Co-CEO consistency: Watch product launch cadence and strategic messaging clarity. Cracks typically appear within 2-3 quarters.

5. ARPU trajectory: Flat in Q3 explained by mix. Two consecutive quarters negative = pricing power ceiling hit.

The End of the Beginning

Spotify’s first decade solved building a product users loved at scale. That phase is definitively over. The company now enters an era where the primary challenge is operational excellence—improving faster than competitors while expanding margins through AI efficiency.

The competitive moat is increasingly the execution engine itself—the organizational system turning strategic flexibility into shipped features at unmatchable pace. Individual features can be copied; an entire operational system cannot.

At 48x forward earnings, the market prices in this engine’s success. If execution stumbles, downside is meaningful given little margin of safety. The co-CEO structure remains the wildcard. If Norström and Söderström execute cleanly through 2026, Spotify will likely exceed targets. If friction develops, the execution advantage could erode quickly.

The engine runs beautifully today. The question is whether it can maintain that precision under pressure of expectations that leave no room for error.

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