Spotify’s gross margin guidance beats expectations; JPMorgan sees profits emerging after investment peak

Where did the upside primarily come from?

Spotify’s gross margin guidance for the fourth quarter of 2026 is 33.8%, up 0.8 percentage points from the third quarter and above JPMorgan’s prior estimate of 33.4%. This directly addresses investors’ pre-earnings focus on fourth-quarter gross margin.
Third-quarter results themselves were closer to the bank’s expectations: revenue of 4.969 billion euros was 0.1% above its estimate but below the company’s earlier guidance of 5 billion euros; operating profit of 672 million euros was 0.8% below the bank’s estimate. The improved assessment mainly reflects the subsequent earnings trajectory.

Management reiterated that 2026 is an investment year: operating expense growth peaked in the third quarter and began to slow in the fourth. The company expects both gross and operating margins to increase in 2027, but has not yet provided full-year guidance.
JPMorgan expects gross margin in 2027 to improve by about 1.2 percentage points from 2026. However, the seasonal shift in advertising and investment in expanding audiobooks to more than 180 markets and the creator partnership program to more than 50 markets will first cause gross margin to fall by 0.5 percentage points quarter over quarter in the first quarter of 2027.

Spotify is using its Large Taste Model to improve personalized recommendations and feedback on the use of mixing tools to optimize the model. 40 million paid users have listened to mixed playlists, with related consumption up 90% quarter over quarter; audiobook expansion adds further content to subscriptions.
JPMorgan’s reasoning is that the experience and content increase subscription value, which can then be monetized through add-ons, tiered plans and price increases. It raised its forecast for paid users in 2027 from 342 million to 344 million, and monthly average revenue per paid user from 5.07 euros to 5.19 euros.
There were no new product developments for the closely watched AI mixing plan, and the bank now expects it to launch in 2027. Long-term pricing power is another key constraint it identified; growth in product usage still needs to translate into user payments.

Third-quarter advertising revenue was 482 million euros, up about 10% year over year on a reported basis. Excluding currency effects, growth was about 9%, above 3% in the second quarter. Growth was driven by programmatic sales and podcasts, with programmatic channels now accounting for 40%.
The recovery still faces structural constraints: average ad-supported users grew 13% year over year in the third quarter, but monthly average advertising revenue per user was 0.32 euros, down 2.4% year over year. The revenue recovery has yet to be accompanied by a return to year-over-year growth in monetization per user.

JPMorgan maintained its Overweight rating and raised its price target for December 2027 from 650 dollars to 700 dollars, based on a valuation of about 21 times approximately 6 billion dollars in free cash flow in 2028. Comparable subscription companies trade at about 16 times; the bank attributes the premium to faster revenue growth and improving profitability.
The model changes were not upward revisions across the board: the 2027 revenue forecast rose about 2% and operating profit about 3%, but net profit was cut by about 3%, and free cash flow fell from 4.376 billion to 4.267 billion euros. The higher price target did not coincide with an increase in the near-term cash flow forecast.