Spotify: Music To Your Ears

Spotify has invested heavily over the last decade to establish its dominant market position, and investors can now look forward to greater leverage on this investment and higher margins. At its 2022 investor day, management announced a medium /long-term operating margin target of 10%+, a stark contrast to -2% achieved over the last 10 years.

Spotify offers consumers a platform to listen to a wide library of audio content at the push of a button. The addition of podcasts and audiobooks was a natural evolution of the technology and both these initiatives are in the early stages of monetisation. Spotify has established itself as the #1 podcast platform in the US in just a few years. This remains monetized, operating under an ad-supported model, but there is scope to launch a fully separate podcast tier and charge consumers directly. User engagement in podcasts and audiobooks increases the importance of the platform to consumers and is potentially the additional consumer surplus that allowed for recent price increases.

Music remains one of the cheapest forms of entertainment relative to TV, video games, etc. On average, people in the US spend 26 hours a week listening to music for ~$9.99 a month (as of 2019), averaging $0.38 per hour vs cable TV at $0.8. Streaming has increased the consumer surplus drastically, we can now listen to all the music in the world, anywhere we want at the touch of a button for a little over $10 a month. This annual budget a decade ago would have bought a consumer just 10-12 CDs. Music streaming remains under-monetised and there is sufficient consumer surplus to warrant many years of incremental price increases.

Margin Improvement

Investors have been looking forward to profits for some time, but heavy investment kept a healthy margin profile at bay. If management can show consistent margin improvement, this will be a catalyst for the stock.

Ad Expansion & Innovation

Experts note that the ad-supported segment is expanding rapidly. Improvements in ad technology and engagement are already beginning to drive incremental revenue, whilst near-term initiatives such as new feature rollouts and a new super-premium subscription service could immediately boost average revenue per user.

Emerging Markets

Spotify maintains a dominant position in developed markets—with mature regions like Sweden boasting over 60% penetration—but its long-term growth story will increasingly depend on expanding in emerging markets. While strong local competition is a challenge, capturing significant market share in these regions could extend its growth trajectory, as deeper geographic diversification and rising subscriber numbers are expected to propel overall revenue.

Global Smartphone Penetration

Spotify's growth is driven by technological advancements, with emerging markets worldwide undergoing a smartphone revolution that is democratising access to digital platforms. This expanding accessibility will be a major growth engine, attracting new users to Spotify. As these markets evolve, users are likely to shift from ad-supported access to paid subscriptions, eventually absorbing price increases as the markets mature. This progression offers investors a sustained, multi-layered growth opportunity.

Diversifying Content & Leveraging AI

By broadening its content portfolio to include areas like audiobooks, live audio, and other verticals, Spotify can build a more robust, multi-dimensional ecosystem that drives long-term value. Continued investment in AI and data analytics will likely enhance personalization and user engagement, cementing Spotify’s competitive edge over the long term.

A crowded streaming market may force Spotify into aggressive pricing and higher marketing spend, while evolving regulatory standards—especially around data privacy and content licensing—could add compliance costs and restrict operational flexibility.

Significant investments in new content formats and technological innovation are critical for maintaining its market lead. However, delays or challenges in integrating these initiatives—particularly in podcasting and international markets—could impede anticipated revenue and margin improvements.

Spotify’s growth is closely linked to consumer spending and the broader advertising market. Economic downturns or market shocks can reduce discretionary subscription spending and lower ad revenue, directly impacting financial performance.