Why does Bernstein believe Spotify can chart its own course?

  • For most of this year, Spotify shares have moved in tandem with the traditional media sector. Since the end of the second quarter, however, consensus for its 2027 operating profit has remained broadly stable, while estimates for traditional media have been substantially revised downward. Bernstein believes the two are entering different phases: traditional media companies are working to protect profits, while Spotify is beginning to retain the benefits of operational improvements on its income statement.
  • The bullish call reflects greater confidence in the earnings trajectory rather than a substantial increase to the current model. The firm nudged its 2027 operating profit forecast from €3.916 billion to €3.924 billion; the higher price target mainly reflects a higher long-term growth assumption, with the implied forward price-to-earnings multiple rising from roughly 30 to 34 times.

Where would the approximately €200 million of profit above consensus come from?

  • Consensus already calls for approximately €3.73 billion in 2027 operating profit, up about 30% year on year. Bernstein estimates that an additional approximately €200 million would bring the figure to roughly €3.92 billion, with growth approaching 38% and profit about 5% above consensus.
  • The three levers are: continued slower growth in marketing spending, contributing about €50 million; keeping AI spending flat in absolute terms rather than expanding it with the business, contributing about €50 million; and a higher share of non-music content such as audiobooks, improving the gross margin mix and contributing about €100 million.
  • Its sensitivity scenario implies a 2027 overall gross margin of 34.5% and expense growth of 8%. Management has expressed an intention to progress toward its long-term gross and operating margin targets and control expense growth, but has provided no substantive 2027 guidance.

How far do the disclosed operating figures support the thesis?

  • In the third quarter of 2026, average monthly revenue per paid user was €4.95, up from €4.53 a year earlier, with price increases the main driver. The gross margin of the paid business also rose from 33.2% to 34.5%. This supports the thesis that higher monetization can unlock profits.
  • But revenue growth has not yet translated into a higher profit margin: third-quarter revenue was €4.969 billion, and overall gross margin was 33.0%, below the second quarter’s 33.4%. Operating profit was €672 million, above €582 million a year earlier but approximately 11% below consensus. Free cash flow was €735 million, also approximately 17% below consensus.

How could AI and royalty negotiations change the profit opportunity?

  • Usage in regions with AI features has been more resilient, but the improvement is relative: average active days from 2 through September of 2026 fell 0.01% year on year in the US and 0.77% in New Zealand, versus a decline of 2.57% in the other 105 countries where prompt-based playlists were unavailable. Meanwhile, average daily minutes of use declined in the latest quarter; Bernstein believes new users may have pulled down the average.
  • Record-label renewals are a variable that directly affects profit: under the firm’s assumptions, every 1% increase in recorded-music costs reduces 2027 operating profit by approximately €75 million–80 million. Its €3.92 billion framework does not require a more favorable outcome in royalty negotiations; its positive view of Spotify’s bargaining position rests on the belief that, following the flood of AI-generated songs, record labels have a greater need for platforms to help their works be discovered.

What valuation assumptions underpin the $725 price target?

  • Bernstein maintained its “outperform” rating and raised its price target from $625 to $725, implying approximately 24% upside from the 23 October closing price of $584.22. The target uses a two-stage discounted free cash flow model, assuming a weighted average cost of capital of 11% and perpetual free cash flow growth of 3%.
  • The revaluation therefore depends on both profit realization and assumptions about long-term growth. User churn caused by price increases is a downside risk identified by the firm, and it also directly constrains the path to higher earnings through increased revenue per user.