A steady quarter: Why does fourth-quarter guidance matter more?

  • Spotify’s third-quarter revenue, gross margin and operating margin were broadly in line with Goldman Sachs and market consensus. Growth in users and revenue per user across the paid and ad-supported businesses offset faster increases in marketing, cloud and AI spending.
  • The real surprise came from the fourth quarter: the company’s operating profit guidance of 820 million euros exceeded Goldman Sachs and market consensus. Management expects spending to moderate in the fourth quarter and beyond 2027, leading Goldman Sachs to raise its fourth-quarter operating profit forecast from 791 million to 819 million euros.
  • The profit improvement is driven mainly by expenses. At the same time, Goldman Sachs slightly lowered its fourth-quarter revenue forecast to 5.202 billion euros and cut its gross margin forecast from 34.1% to 33.9%, while raising its operating margin forecast from 15.2% to 15.8%.

Subscriptions or advertising: Which growth path is firmer?

  • Subscription growth is clearer. Management said more regions are becoming drivers of new paid subscribers. Goldman Sachs raised its forecast for paid subscribers at the end of the fourth quarter from 313.3 million to 316 million, in line with company guidance; it expects net additions of 10 million for the quarter, up from its previous forecast of 8.2 million.
  • Beyond paid subscriber growth, Goldman Sachs is positive on subscription price increases staggered by region every one to two years, and differentiated pricing from new product tiers. Its growth thesis is to expand the user base, then increase monetization through free-to-paid conversions, price increases and add-on products; churn following price increases is a key constraint.
  • Advertising trends are improving, but model revisions remain cautious. Third-quarter advertising revenue growth was close to double digits, and the company reiterated guidance for double-digit growth in 2027 and beyond; Goldman Sachs nevertheless cut its fourth-quarter advertising revenue forecast by 2.2% to 568 million euros and its 2027 forecast by 1.4%.

Can slower spending translate into profit and cash?

  • Management views investment in AI, cloud and products as phase-specific spending, strengthening Goldman Sachs’s confidence that gross and operating margins will continue to improve in 2027. However, it raised its 2027 operating profit forecast by only 0.2% to 3.789 billion euros, while its operating margin forecast edged down from 16.7% to 16.6%.
  • Profit and cash performance have already diverged: third-quarter free cash flow was below Goldman Sachs and market expectations, weighed down by adverse working-capital movements. Goldman Sachs also lowered its fourth-quarter free cash flow forecast from 952 million to 851 million euros, a cut of 10.5%.
  • The revenue contribution from new products is also constrained by the pace of their rollout. Updates on the launch timing, artist participation and financial contribution of AI cover and remix add-on services have been limited; additional investment in audiobooks, podcasts and the platform could also weigh on margins.

What assumptions are included in the rise to a $700 price target?

  • Goldman Sachs maintained its Buy rating and raised its 12-month price target from $645 to $700. The increase reflects both modest upgrades to long-term forecasts and higher valuation multiples, rather than a large earnings upgrade.
  • The valuation comprises two equally weighted components: one uses an enterprise value to GAAP EBITDA multiple, raised from 22.5 times to 23 times; the other values free cash flow after stock-based compensation, with the multiple raised from 21 times to 22 times, then discounted at 12%. Goldman Sachs attributes the higher multiples to the recent re-rating of the share price and higher long-term forecasts.