Spotify Soars After Earnings as the Company Touts AI Benefits and Moderating Costs

Key Points

• Spotify shares jumped 11% after earnings, its largest single-day gain since May.
• Investors appeared encouraged by underlying metrics like premium subscriber growth, gross margin expansion, and progress on AI initiatives.
• Spotify expects costs to moderate going forward and has set 2030 targets of 35% to 40% gross margin and over 20% operating margin.

Shares of Spotify Technology NYSE: SPOT surged following the company’s latest earnings report, ending its two-quarter streak of post-earnings falls. Spotify shares gained 11%, good for the entertainment stock’s largest single-day gain since May, and leaving shares roughly flat on the year.

In contrast to what investors might have expected, Spotify’s sharp rise wasn’t due to the company smashing expectations on headline metrics. In fact, the company posted in-line or below consensus numbers on several key figures. Rather, it appears investors viewed Spotify’s longer-term trajectory favorably, with the company touting its AI initiatives while also expecting costs to moderate over the coming quarters.

Spotify Posts Mixed Headline Metrics, Solid Underlying Metrics

Spotify’s revenue during the quarter was 4.97 billion euros (approx. $5.58 billion), an increase of 14% year-over-year (YOY) on a constant-currency basis. This figure fell slightly short of estimates of $5.64 billion. However, adjusting for currency movements in relation to expectations, Spotify’s revenue was essentially in line with estimates.

Spotify’s diluted earnings per share (EPS) was $2.78, which was significantly below estimates of $3.16. In Q4 2026, Spotify expects to report revenue of approximately $5.82 billion, also slightly below estimates near $5.86 billion. In the context of Spotify’s lackluster headline numbers, it seems that investors put more weight on other metrics reported by the company.

Notably, the company’s premium subscribers increased 9% YOY to 306 million, one million ahead of its guidance. Additionally, gross margin expanded by 140 basis points YOY to 33%, which was 10 basis points higher than expected, while operating income was also above guidance. The company’s monthly active users (MAUs) increased by 11% YOY to 788 million, right in line with its target.

Next quarter, Spotify expects to add 30 million MAUs and 10 million premium subscribers, moving the total figures to around 818 million and 316 million, respectively.

Spotify Highlights AI Investments Including Its “Taste Model”

Spotify also called out how it expects AI investments to benefit its growth over time, highlighting several key vectors. One of the most notable is the company’s use of AI in building and improving its “large taste model.”

Spotify uses trillions of data points on user listening habits and trains its taste model to predict what people will want to listen to next. The ultimate goal is to increase user engagement by helping people discover more content they enjoy. Spotify notes double-digit growth in discoveries, a leading indicator of how “exciting” users find Spotify. The company says that even as the taste model is in its early stages of rollout, it is already on track to add billions of hours of listening per year.

Potential Engagement Gains and Moderating Costs Could Benefit Margins Long Term

Increasing engagement is key for multiple reasons. First, it can make people more likely to keep their subscriptions, reducing churn. This is important because Spotify's user growth metrics subtract users lost from users gained, resulting in a “net” figure. By reducing churn, Spotify needs to add fewer new users to increase its overall user base, benefiting revenue growth over time.

This can also make people less likely to unsubscribe when Spotify increases prices, making it more likely to achieve the desired growth from price hikes. Price increases can account for a significant portion of Spotify’s growth. During the quarter, 7.5%, or around half of Spotify’s 15% constant currency premium revenue growth, came from average revenue per user (ARPU) expansion. The company notes that price increases were the primary driver behind ARPU expansion.

Despite not delivering particularly impressive growth metrics during the quarter, Spotify’s rally may be attributable to encouraging early signs from its AI initiatives and its cost trajectory. The firm expects a gross margin of 33.8% next quarter, up approximately 70 basis points YOY. It sees investments and costs moderating from Q3 to Q4, and into next year. Additionally, its AI investments have accelerated the shipment of new features, all while keeping its headcount flat, according to the firm.

These factors suggest that Spotify could realize the growth benefits from its AI investments while also protecting profitability, potentially setting the firm up for sustainable margin expansion long term.

By 2030, Spotify is targeting a gross margin of between 35% and 40%, which would be a 300 basis point to 800 basis point expansion compared to its 2025 gross margin of 32%. Spotify is also targeting an over 20% operating margin by 2030, which would be an over 700 basis point increase compared to 13% in 2025.