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Spotify just dropped its Q3 numbers, and the market yawned – a collective "meh" despite what looks like a solid earnings beat. Shares dipped, which begs the question: is there something the market sees that the official press releases are glossing over? Let's dissect.
The Headline Numbers: A Closer Look
On the surface, it's all sunshine and roses. Earnings per share doubled year-over-year, revenue jumped, and the user base swelled to over 700 million. Gross margins are up, operating income is up – all the arrows are pointing in the right direction. CEO Daniel Ek is practically doing cartwheels, proclaiming a "healthy business" shipping faster than ever. But let's pump the brakes for a moment.
The devil, as always, is in the details. Revenue did increase 7% year-over-year, hitting $4.9 billion (slightly above the $4.86 billion consensus). But that "slightly" is doing some heavy lifting. We're talking about a rounding error in the grand scheme of things. And while a 200% jump in profit sounds impressive, remember that it's off last year's numbers. How sustainable is that growth trajectory?
MAUs (Monthly Active Users) are up 11%, which is good news. Premium subscribers are also up, reaching 281 million. But here's where I start to raise an eyebrow. Spotify is forecasting 745 million MAUs and 289 million premium subscribers for the next quarter. That's an anticipated slowdown in growth, especially in premium subscriptions. Are they hitting a saturation point? Is the pricing strategy starting to backfire, pushing users to ad-supported tiers or competitor platforms?
Leadership Shift & Future Outlook: A Calculated Risk?
Adding another layer to this is the leadership transition announced for 2026. Daniel Ek is stepping down as CEO, to be replaced by co-CEOs Gustav Söderström and Alex Norström. Now, the company is framing this as a move towards stability and operational continuity. Wall Street seems to be buying it, but I'm not entirely convinced.
Splitting the CEO role is a bold move. It can work if the responsibilities are clearly defined and the two leaders have a strong working relationship. But it also introduces the potential for conflict, confusion, and a lack of clear direction. (Think of it like two conductors trying to lead the same orchestra – it can get messy.) This structure has been "in practice since 2023," they say. I've looked at hundreds of these filings, and that's an unusual way to phrase that. What exactly does "in practice" mean? Were they auditioning for the roles?
The company's Q4 outlook is also a mixed bag. They're projecting revenue of €4.5 billion, which is slightly below analyst expectations. They're blaming currency pressures, but is that the whole story? Gross margin is expected to rise, but only by a small amount. Operating income is projected to increase, but again, the growth is modest. The expectation is that the U.S. price increases will help bolster margins, but that's speculation.
And this is the part of the report that I find genuinely puzzling. Spotify is partnering with Netflix to stream video podcasts. Now, diversification is generally a good thing, but is this the right move for Spotify? Are they trying to be all things to all people? Or are they simply chasing the next shiny object? The partnership feels a bit… desperate.
The Analyst Echo Chamber
Wall Street analysts are overwhelmingly bullish on Spotify, with a "Strong Buy" consensus rating and an average price target of $801.04, suggesting a 28% upside. But analyst ratings should be taken with a grain of salt. They often lag behind market realities and can be influenced by factors other than pure financial analysis. (Remember, these are the same people who were touting Enron as a great investment right up until the bitter end.)
The TipRanks data shows 19 "Buys" and 5 "Holds" over the past three months. That's a pretty lopsided ratio. Where are the "Sells"? Are analysts afraid of rocking the boat? Or are they genuinely convinced that Spotify is a slam-dunk investment? I'm not seeing the same level of conviction in the numbers.
The Market Knows Something We Don't
The market's muted reaction to Spotify's Q3 earnings speaks volumes. Despite the headline numbers, there are underlying concerns about growth, leadership, and strategic direction. The company is facing increasing competition, pricing pressures, and the challenge of maintaining its dominance in a rapidly evolving market.
The transition to co-CEOs adds another layer of uncertainty, and the partnership with Netflix feels like a distraction from the core business. While Spotify has made significant progress in recent years, it still has a lot to prove. The numbers look good but the market seems to be saying that the shine might be wearing off.