Spotify Q4'24: Make valuation great again

Spotify reported an overall very strong, better-than-expected Q4 report. The report had many bright spots, including a notable beat in MAUs and subscribers. Considering this, the MAU/subs guidance for Q1’25 was conservative, indicating a modest increase of +3m MAU and +2m subs. However, the management remains confident on user growth to be in line with last 4-5 year for 2025. In addition, Q1’25 EBIT guidance was well-above our and consensus estimate, showcasing strong operational efficiency. On the back of the better-than-expected Q4 report, we have raised our estimates, particularly for profitability. However, despite these adjustments, the continued appreciation in the share price keeps the valuation picture unattractive. As such, we continue to view the risk/reward as insufficient and reiterate our Reduce recommendation, while raising the target price to USD 535 (was USD 470).

Strong numbers across the board

We think the key takeaways from Spotify’s Q4'24 print was the strong intake in MAU/subs as well as the increased evidence of improved resource utilization to sustain strong growth at a lower cost profile. Revenue grew 16% year-on-year to 4.2 BNEUR (Q4’23: 3.7 BNEUR), driven by a 12%/11% increase in MAU/subs and a 5% rise in premium ARPU. Gross margin expanded to 32.2% (Q4’23: 26.7%), marking a ~560 bps y-y increase, supported by content cost favorability and bundled subscriptions, among others. Operating income (EBIT) reached 477 MEUR (Q4’23: -75 MEUR), reflecting an 11% EBIT margin, which was 10% above our estimate of 434 MEUR. The deviation stemmed primarily from stronger gross margins and lower OPEX. FCFF came in at 877 MEUR (Q4’23: 396 MEUR), reflecting a 21% margin.

We raise our estimates on strong user and earnings beat

Forward commentary indicated an accelerated pace of product launches during 2025, with increased investments aimed at improving the music experience on the platform (e.g. video, higher price super-fan tier etc.) while maintaining high cost discipline. Given these expected investments in the platform, the management hinted that the gross margin may be slightly more variable during 2025 but expects the full-year gross margin to be higher than in 2024. Regarding the new UMG deal and potential launch of educational courses in the U.S., no specific details were shared during the earnings call. However, regarding the former, the management was clear that the new agreement is a win-win and reflecting on this, we believe it is unlikely that Spotify would have extended the deal early on unfavorable terms. Following the Q4 report, we have raised our estimates across the board, particularly for profitability. For 2025, we now estimate Spotify to add some 60 MAU (of which 23m subs) which, combined with improved monetization, supports a revenue growth of 18% to 18.5 BNEUR. Additionally, we raise our EBIT estimate for 2025 by 15% to 2.3 BNEUR (13% margin).

Valuation still unattractive

Despite raised estimates, Spotify’s valuation remains stretched. Based on our updated estimates, Spotify trades at EV/EBIT 49x, EV/FCFF 35x, and EV/GP 19x for 2025e. We believe these multiples are on the high side, even when considering next year’s corresponding multiples (26e: 38x, 30x, and 16x). To arrive at more reasonable valuation levels, we need to extend our scope to 2027e, where Spotify trades at EV/EBIT of 31x, EV/FCFF of 26x, and EV/GP of 13x. Our DCF model, assuming sustained strong growth and margin expansion, supports our view on the valuation, indicating a fair value of USD 529. That said, we do think that the Q4 report reaffirms Spotify’s market-leading position and operational excellence, but that current valuation does not offer a compelling risk/reward profile, making it difficult to justify entering the stock at this time.