News of the Week (August 18-22, 2025)

Housekeeping:

I hope everyone is enjoying the look and feel of the new website. We are still sorting out a few bugs, so things like content categories are not correctly tagged yet. Furthermore, if you don’t have the access you think you should have as part of your subscription please reach out. A few of the subscriptions did not properly migrate and we’re happy to fix it. Growing pains. We will get everything sorted over the next several days and we thank you for your patience.

The launch of the website took basically my entire week. We were working on fixes into the very late evening/early morning every day. I did not get to the Cloudflare review like I wanted to, but will be sending that at some point in the near future.

Finally, I hope the Max readers who have joined the Discord page are enjoying that new feature. I’m elated to have a place where I can share contextualized alerts on stocks in a more real-time fashion and field your questions. I’m also excited to see the Nerd community come together to collaborate on stock ideas and inspiration. We’ve worked so hard to attract the right type of reader to our platform. Rational, mature & bright investors. You all have something to contribute. Now, we have a place to do that away from the noise. If you’re a Max subscriber and haven’t signed up for it yet, I promise it’s very easy. The instructions can be found here, and there’s even a screen recording to walk you through the small number of steps.

Next week, we’ll send reviews on Nvidia, CrowdStrike, SentinelOne and MongoDB.

In case you missed it from this earnings season:

& my current portfolio/performance.

1. Spotify (SPOT) – Catch-Up Earnings Review

a. Key Points

Spending more money on product innovation. That and higher payroll taxes held back profits.
Strong quarter for user growth.
Newer content categories are all performing well.
AI DJ grew engagement by 2x Y/Y.

b. Demand

Missed revenue estimates by 2% & missed guidance by 2.6%.
- The miss was related to FX headwinds that were €104M larger than expected. Without this item, revenue would have been slightly ahead of estimates and roughly in line with guidance.
- Constant currency (CC) revenue growth was 15% Y/Y.
- Growth was strongest in Latin America.
- Premium revenue growth remains strong in its most mature markets, pointing to plenty of runway remaining.
Ad revenue missed estimates by 5%.
Premium revenue missed estimates by 1.3%.
Beat Monthly Active Users (MAUs) estimates by 1% and beat guidance by 1% as well.
- Added 18M net new MAUs vs. 11M expected and added its second most Q2 MAUs in company history.
Beat premium subscriber guidance by 1.1%.
- Added 8M net new subscribers vs. 5M expected.
- Europe is its first region to cross 100M subscribers.

c. Profits & Margins

Gross profit margin met 31.5% estimates & identical guidance.
Missed EBIT estimates by €89M or 18.1% & missed guidance by 25%.
Social charges (payroll taxes) were Still, you’d think analyst estimates would have moved to reflect that.
Beat FCF estimates by 14%.

Premium segment GPM expansion was driven by revenue growth outpacing music related cost growth, as well as audiobook efficiency gains. These tailwinds were partially offset by incremental costs related to the Spotify Partner Program (SPP). As a reminder, SPP lets podcasters tap into ad revenue sharing like creators on YouTube and X can. Ad-supported margin expansion was driven by podcasting and music gains.

The EBIT miss included payroll taxes that were €98M larger than expected due to its rising share price. They call these “social charges.” Without this headwind, which should have been at least partially baked into analyst estimates, it would have beaten EBIT estimates by 1.8% and missed its guidance by 6.5%. The remainder of the miss was driven by some modest tax headwinds and also “lighter ad sales.” More on that later. With all of these charges, OpEx rose by 8% Y/Y. Excluding the social charges and some FX headwinds, OpEx rose by 5% Y/Y due to more marketing and headcount growth.

d. Balance Sheet

€8.4B in cash & equivalents.
€1.93B in convertible senior notes.
- Some of these mature in March.
Share count fell slightly Y/Y. Added $1B to its existing buyback program. It has $1.9B in remaining buyback capacity.

e. Guidance & Valuation

Revenue guidance missed estimates by 6.4%.
- This €286M miss includes a €200M foreign exchange (FX) headwind.
31.1% gross profit margin guidance missed 31.5% estimates by 40 basis points (bps; 1 basis point = 0.01%).
- They continue to see material GPM expansion in the years ahead.
EBIT guidance missed estimates by 15%.
MAU and premium subscriber guidance both slightly beat estimates.
- They think they are well on their way to 1B+ subscribers over the long haul.
CC average revenue per user growth is expected to be around 0% Y/Y.

SPOT trades for 40x forward FCF and 60x forward EPS. FCF is expected to grow by 12% this year, 30% next year and 27% the year after. EPS is expected to grow by 15% this year, 86% next year and 32% the year after that.

GPM guidance includes a 40 basis point (bps; 1 basis point = 0.01%) headwind from regulatory charges.

The EBIT guidance miss was explained as near-term expense growth and timing. This is also modestly impacting input costs (more content) and therefore GPM. Spotify sees great opportunities to expand content breadth, introduce new products, bolster subscription tiering and enhance lifetime value. This requires some temporary spending growth to support the future rollouts, and it sounds like that’s the source of this shortfall. The team has effectively managed costs and delivered a margin explosion while keeping the growth engine humming. They’ve demonstrated strong capital allocation skills and, in my mind, have earned the right to invest. The company still expects to deliver Y/Y margin expansion this year, but this guidance led to EBIT estimates falling by about 6% for 2025 and falling by a few percent for 2026.

💡

“I want investors to know we will do what we think is right for the long-term business… we generally expect to see more efficiencies as we're leveraging better and better tools. But sometimes that efficiency may mean that the right thing is to actually spend more in the short term to then get it back in the long term.” – Co-Founder/CEO Daniel Ek

f. Call & Release

Advertising Softness:

It’s worth noting that a shift away from owned-content (and massive associated contracts) towards licensed podcasts held back growth a tad; rolling out SPP and the ad-revenue sharing did too. Without these two items that cut overall impressions and revenue kept per impression, growth would have been around 10%-12% Y/Y. Despite that, leadership bluntly told investors that they’re disappointed in the ad business’s performance. Ek thinks they’re moving too slowly, and the teams are being reorganized to accelerate pace of progress. This is why their head of advertising left for DoorDash (they pushed him out).

Spotify doesn’t need to change the go-to-market approach or any strategic objective within this arm of the business. They simply need to execute better. Spotify has a massive and engaged audience that advertisers yearn for, and it’s determined to more meaningfully unlock that potential.

There are some early signs of progress. Growth was fastest within its new, automated Spotify Ad Exchange (SAX), where advertisers rose by 40% Y/Y. As a reminder, this is a dedicated supply-side platform. It entailed an overhaul of Spotify’s advertising tech stack and greatly enhanced its capabilities. Specifically, the platform unlocks granular user identification and targeting so advertisers know where and how to spend. And it makes these impressions fully biddable to allow superior targeting and identification, fostering favorable price discovery and optimal cost per impression. Over time, this should help compensate for the underwhelming ad pricing environment SPOT has cited for over a year now. Just like in streaming, programmatic, biddable advertising is how publishers like Spotify can fund hefty content spend while delivering strong margins. And it’s how that can happen while advertisers still enjoy stronger ad returns – thanks to the upgraded efficacy SAX delivers. So again… this part of the ad business is going pretty well. They just want it to be going even better and want SAX to more quickly expand as a percent of total segment revenue.

SAX added a Magnite integration to tap into the demand-side platforms that this sell-side player partners with.

Increasingly Diverse Content Types & Subscription Tiering:

Audiobooks are a great example of where Spotify is expanding content categories and deepening overall engagement and retention. This quarter, it expanded premium audiobook subscription options to 4 new markets in Europe. It also launched a new audiobook plan (Audiobooks+) that offers 15 more listening hours per month for users in 13 countries. As part of this, it also launched Audiobooks+ for Family and Duo plans (first premium audiobook plans for these types of subscriptions). All in all, audiobook premium traffic continues to steadily rise, with 35% Y/Y growth in the important U.S., U.K. and Australian markets.

Aside from audiobooks, customers who watch video podcasts are growing consumption 20x faster than solely audio users. Video podcast views are up 65% Y/Y as well.

We did not get much of an update on the planned superfan music subscriptions. This will likely include exclusive artist events and other perks like that. Spotify has an extremely high quality bar for product delivery (as it should). It does not think this product is ready to be released, but it’s making great progress.

AI & Product Innovation:

AI DJ is a personalized music curation with an agentic host.
AI Playlist allows users to conversationally tell Spotify what they like and what they’re in the mood for to automatically generate relevant playlists.

Spotify continues to bolster engagement through AI-inspired personalization. AI DJ streams are up 45% Y/Y and engagement is up 100% Y/Y, as Spotify added it to 60 new markets and users gravitated towards the offering. The conversational nature of telling it what to play is resonating, and sessions only get more relevant and accurate with time. That’s why engagement growth is well beyond stream growth.

AI Playlist entered 40 new markets this quarter. Its ability to use explicitly stated musical preferences in addition to user history is upleveling output quality. And, like AI DJ, it merely gets better with more data and time.

Adding new ways to pre-save new music and discovery content.
Product improvements are driving improvements in free-to-paid conversion rates.
AI is materially improving internal efficiency for Spotify, like so many other firms.

Apple & Epic Games Ruling:

As a reminder, a court ruling between Epic Games and Apple forced the mega-cap to allow payment steering, or enabling app owners to direct customers to different checkout options. This is helping unlock considerably more a la carte purchasing optionality with Spotify gaining more flexibility in payment options and workflows. Per leadership, content leaders of the future will excel in premium subscriptions, ad-based growth and a la carte. SPOT kills it on the premium side, is working to improve the ad side and is excited to more meaningfully enter the a la carte side.

This ruling also allows Spotify to communicate with its customers in more direct and actionable ways. The enabling of call-to-action options for vendors like Spotify mean it can now alert subscribers when subscriptions lapse due to term expiration or a failed payment. That and enhanced payment optionality directly helped subscriber retention and conversion dynamics during the quarter.

Pricing Power:

Price hikes in France, Luxembourg, the Netherlands and Belgium were met with no material churn. Spotify continues to meticulously update pricing in various markets and for various tiers nearly every single quarter. That will likely continue. With its best-in-class engagement, it could easily be hiking prices more sharply and frequently. But? It fixates on “putting its subscribers on a pedestal” and taking elite care of them. It wants its price-to-value lead vs. the competition to perpetually grow, which requires slower pace of pricing growth.

g. Take

Not an amazing quarter but certainly not terrible either. Spotify has trained investors to expect great demand and profit outperformance for about 2 years now. This was a modest deviation from that positive theme – but for reasons I found acceptable. This great team has proven how capable they are of deploying capital, nurturing the growth engine and expanding margins. They’ve delivered a profit explosion while demand didn’t materially slow. That’s hard to do, and is a testament to how beloved and sticky this product is. They compete with several mega caps that have crushed countless smaller competitors… Yet David continues to flex its muscles vs. multiple Goliaths.

I get excited when this team identifies new growth opportunities, and support their decision to take advantage of those high-return prospects. It’s not about maximizing profit for a three-month period (even though Wall Street routinely makes us feel like that’s all that matters). It’s about optimizing long-term value creation, and doing so for Q3 requires getting aggressive with OpEx and accepting modestly lower near-term margins.

2. Palo Alto (PANW) – Earnings Review

a. Palo Alto 101

This is a recurring section in each quarterly PANW review. A lot of it is the same as last quarter, with a few updates on product news since then.

Palo Alto is a cybersecurity company competing across endpoint, cloud and network. It’s pushing to bundle next-gen products into larger deals to differentiate vs. firewall-based competitors like Fortinet and next-gen disruptors. This process of “platformization” will again be a key piece of this review.

Cortex Security Operations:

Cortex includes its endpoint and security information and event management (SIEM) products. SIEM aggregates needed context to make sure decision-making and work are more cohesive. Extended Security Information and Event Management (XSIAM) is the product umbrella to know. It brings together all endpoint use cases and SIEM to power Palo Alto’s Security Operations Center (SOC). The SOC is the central monitoring and protection engine of a company’s cybersecurity workflows. It is what units all needed data and context, providing companies a bird’s-eye view of their businesses, with a complementary data lake to ensure scalable ingestion of needed context. Companies can access their endpoint data, Strata data (couldn’t resist) and a host of 3rd parties in the ecosystem. More usable data means better outcomes.

More endpoint security products to know:

XSOAR helps automate and guide best practices for incident response while ranking severity of threats. It relies on SIEM for its scaled, complete data ingestion to direct optimal workflows.
Xpanse provides attack surface management.
XDR infuses non-endpoint data sources into breach protection to extend coverage beyond strictly that endpoint. Adding more data without sacrificing cost and latency performance is where SIEM shines.

In a somewhat confusing manner, PANW leadership will talk about Cortex endpoint platform-level wins and SOC wins interchangeably, despite the SOC not solely being endpoint products.

Cortex Cloud (was formerly called Prisma): The cloud security suite is now called Cortex Cloud. The change was made to more explicitly communicate how linked its cloud business is to both network and endpoint offerings. Like XSIAM and SASE are the platformization pillars in endpoint and network, in cloud it’s the Cloud Native Application Protection Platform (CNAPP). CNAPP includes:

Cloud Security Posture Management (CSPM) organizes access compliance, provides overarching cloud ecosystem visibility, and proactively blocks misconfigurations.
- It has another product like this for applications specifically. It’s intuitively named Application Security Posture Management (ASPM).
- Data Security Posture Management (DSPM) tags, uncovers & protects data in the cloud. This works for structured data, as well as unstructured data, which is increasingly important in the age of GenAI.
- AI security posture management gives companies an overarching view of their AI assets and environments to flag vulnerabilities and preventatively resolve them.
Cloud detection and response (CDR) proactively hunts and protects customers from cloud-based threats with run-time support.
Cloud Workload Protection Platform (CWPP) is very similar to CDR, but for cloud workloads specifically, rather than identities, API calls etc.
Cloud Discovery & Exposure Management (CDEM) “evaluates internet exposure risks and discovers unknown internet-exposed cloud assets.”

Cortex Cloud ties very closely to both Cortex and Strata. Products like CASB extend cloud security talents to network use cases and are a direct piece of its SASE network offering. Endpoint products like XDR rely heavily on cloud tools as well.

Strata: The network security suite is called Strata. This is where Palo Alto is supplanting legacy firewall vendors by offering (what it views as) superior, software-enabled firewalls alongside a suite of network security software (and some hardware-based firewalls too). It deploys software-defined wide area networks (SD-WANs) within firewall environments. SD-WANs serve as virtual network securers using a software-based approach to protection. Palo Alto protects networks using a “zero trust” architecture. Zero trust means a bad actor cannot penetrate the most vulnerable part of a digital ecosystem and move freely within it thereafter. Zero trust ensures consistent and complex validation of these permissions at every turn. It ends the game of “everyone within a firewall environment getting perpetual, unconditional access” and greatly limits the potential damage of network breaches. There are two pieces of the network bucket: modern hardware and software.

In hardware, PANW provides “next-gen firewalls” with tools like contextual app inspection (more malleable access rules), intrusion prevention, URL filtering, data loss prevention (DLP) and more.
Secure Access Service Edge (SASE) is the overarching software that ties its network platformization approach together and is built on the aforementioned zero trust foundation. SASE integrates tools that help prevent unauthorized access to data, abuse of networks (like phishing attacks to overwhelm networks with traffic) and broad visibility into health and performance of a network. It includes aforementioned SD-WANs, a Secure Web Gateway (SWG) and a Cloud Access Security Broker (CASB) to decide who gets access to which apps.
Strata directly competes against Zscaler and Cloudflare.

Two more pieces of the SASE offering to know – Intersection of Network and Cloud Security (why the products are called “Prisma”):

Prisma Access Platform (PAP): You can call PAP a network or a cloud security tool, as the platform protects networks within cloud environments with aforementioned products like SWG and Zero Trust. PAP includes Prisma Access Browser (PAB). This encrypts and secures remote network connections and browser data across siloed, spread-out workforces.

Prisma AI Runtime Security (AIRS) “discovers AI ecosystems, assesses risk and protects against threats.” It’s an extension of its cloud runtime security tools specifically for AI assets. PANW uses this product internally to give it a full look at all AI assets, with seamless ability to scan and test them when need be. Posture management and configuration analysis products are quite common; effectively protecting cloud environments in actual runtime products like this one, CDR and CWPP (both defined above).

AI Access Security is another SASE product that “secures how internal employees use 3rd-party AI.” And speaking of AI, Palo Alto offers its “Precision AI” bundle. This offers AI-inspired upgrades to a plethora of existing tools and helps protect against AI-powered threats.

Now, onto the quarter…