As briefly mentioned, SPOT expects OpEx growth to sequentially slow during Q4 and throughout 2027. It also expects continued progress toward double-digit Y/Y ad revenue growth. Considering it was at 9% CC growth this quarter, it looks like it will reach this goal during Q4. It has been over 2 years of rebuilding and positioning this segment for sustainable growth. Good to see all of that work paying off.

Spotify trades for 37x EPS and 24x FCF. EPS is expected to grow by 12% this year before growing by 30% in each of the next 2 years. FCF is expected to grow by 16.5% this year, by 22% next year and by 18% the following year.

Ahead on Agents:

A prevailing theme of Spotify’s earnings call was the company being ahead on the innovation curve in a few important areas. One of those areas is agents. The company has intertwined an intelligent consumer agent throughout its entire platform that “can do things today that no other media services can do” – per Gustav Söderström. Use cases include conversationally building playlists and pulling more metadata on songs or other titles to enrich the learning experience. And importantly, while AI tempts everyone to automate more tedious and mandated areas of learning, that’s not where Spotify plays. Super fans don’t want agents to enjoy music for them or absorb information about an artist’s story without them. They want to do that themselves and no better model will change that. On the other hand, these fans would benefit from an AI agent scraping all listening history from a user’s entire Spotify profile to suggest new playlists and artists to enjoy. They would benefit from an AI algorithm sorting songs in a playlist by beats per minute to make a run a little easier. And the company provides these conversationally powered tools too.

Just like the company did with connected speakers, Spotify has led the industry in terms of integrating with leading AI platforms like Muse. While some analysts on the call were worried about chatbots and other AI services disintermediating the Spotify relationship, they don’t see it that way. Instead, like they’ve done with Google Maps and other apps, Spotify is happy to integrate and lets its subscribers or free customers enjoy the content on these other surfaces (served by Spotify). Spotify knows the content tastes of their consumers far better than any of these partners and isn’t afraid to let these people enjoy the library in many places. They also aren’t worried about agents helping customers find dormant subscriptions to cut or cheaper alternatives to Spotify, as their engagement, churn and value proposition are all best-in-class.

“We think Spotify is unusually well positioned for the age of agentic AI. This is because Spotify, unlike most companies, can monetize from the background. Whether you're a premium user or a free user listening to our audio ads, our business model not only works but thrives while Spotify is in the background.” – Gustav Söderström

Interactive/Multiplayer Experiences and Audiobooks:

The other two areas where Spotify feels it’s ahead of the pack are interactive experiences and audiobooks. On the first, Spotify is adding more song mixing tools to let consumers actively customize songs on their own. Not only is this directly giving people more enjoyable experiences, but it’s also feeding SPOT even more granular taste data to accelerate recommendation improvements and keep the consumer experience flywheel humming. On audiobooks, the company will become the “world’s first global audiobook service” after expanding from 22 countries to 180+ by the end of this year. Before any of this kicks in, listenership rose 40% and engagement per listener rose as well. Additionally, customers consuming audiobooks use Spotify more days per month, assisting retention, pricing power (or ad inventory for free users) and lifetime value.

Improving Personalization:

One of the big investment areas this year was in AI taste models to improve subscriber learning and personalization. So far, it’s delivering a 10%+ boost to content discovery and raising overall time spent for some test cohorts. It’s being used to power Spotify’s “Taste Profile,” which just launched in beta for paid subscribers in the USA and allows them to tweak their personalized content algorithm to help Spotify understand what they want more precisely.

Ads:

As leadership told us to expect, the advertising business is finally showing signs of life. Their automated biddable channels again led the way as all of the hard work to build their tech stack finally begins to pay off. Sponsorship products for podcasts were cited as a notable standout, but performance for all segments and content types improved Q/Q. They’re “moving in the right direction, and there’s more progress ahead” according to Alex Norström. Looking ahead, just like we talked about with Netflix, the focus is on consistent and perpetual improvements to buyer usability, measurement, creative ad material automation and targeting.

AI Return on Investment (ROI):

Spotify is confident that AI cost growth is going to flatten from here and that these investments are working. Product development is accelerating while AI features such as “About the Song” are approaching 100M users. Features like these are helping retention and ARPU by creating a more enticing menu of premium add-ons. They feel like a lot of front-loaded AI investments to build out the needed infrastructure and create the agentic platform have happened. They do not see a lot of AI-related cost growth from here and, as briefly mentioned, expect overall cost growth to fall.

Premium Subscriber Runway:

While Spotify is already a massive consumer business, the runway for its premium segment remains long. For context, as leadership talked about on the call, almost 50% of Sweden (its oldest market) pays for the product. In the UK and Germany, it’s in the low-20% range. Globally, under 4% of its addressable market pays for the product. Clearly, the propensity to buy an entertainment subscription is higher in Sweden than in other places, but this still leaves a wonderfully long runway for new people to win over.

More Notes:

Another rock-solid quarter from a world-class company. The subscription business continues to compound at an impressive clip and increasingly humongous size. And finally, the advertising business is showing real signs of life. All of this is happening as the company layers on several new popular features that bolster pricing power and unlock more subscription tiering opportunities. That creates a solid demand setup and should also coincide with 30%+ EPS compounding for 2027-2028 as expense growth slows and top-line compounding stays strong.

I love this business. I wish Founder/Executive Chairman Daniel Ek were still more involved based on a great deal of respect for him, but I do think the current team is still great and this business is about as sticky and durable as they come in the space. This is at the top of my watch list and isn’t in the portfolio solely because of lack of cash availability and wanting to have a little flexibility to add to current core holdings. If any holding stubbed their toe or enjoyed enough multiple expansion to warrant a large trim, I’d seriously consider owning this one.