Spotify: Investor Fatigue to Exuberance Inside of Two Years

Is the stock still cheap?

From a long-term investor’s perspective, Spotify’s third-quarter results were gratifying. While the company’s robust trajectory for Premium sub and MAU growth has been visible for a long time, investors had been unaccustomed to seeing material improvements in Spotify’s financial performance. For example, investor fatigue relating to the lack of gross margin expansion may have reached a peak when I wrote this in May of 2023 (Spotify: A Compounding Effect).

Things have been changing though and the stock market has clearly taken notice. This quarter, gross margin was a standout at 31.1%, up 473 bps year-over-year. That was a 54.5% incremental gross margin. R&D, Sales and Marketing, and G&A each improved by 242 bps, 225, bps, and 103 bps year-over-year, respectively. Operating margin was 11.4%, an all-time high, up 1043 bps year-over-year. Daniel Ek has been delivering on his promise to transform Spotify from just a great product to a great business as well.

The stock has come a long way in a short period of time. After tanking in 2022 along with so many tech stocks, SPOT has climbed almost 6-fold since.

As a long-time Spotify shareholder, I am pleased but I also find it bittersweet to suddenly…