Spotify Reports Fourth Quarter 2025 Earnings

Spotify closed Q4 2025 with robust user and financial metrics: premium subscribers rose 10% Y/Y to 290 million, MAUs increased 11% Y/Y to 751 million, total revenue grew 13% Y/Y on a constant currency basis to €4.5 billion, gross margin widened 83 bps to 33.1%, and operating income reached €701 million. Management noted they met or exceeded guidance, emphasized AI and product initiatives (Prompted Playlist, expanded audiobooks, music videos beta), highlighted paying out over $11 billion to the music industry in 2025, and extended strategic partnerships—signals of continued engagement and monetization momentum that could support further revenue and ARPU upside.

Analysis

Market structure: Spotify’s Q4 (MAUs 751M, Premium 290M, rev +13% CC, gross margin +83bps) signals rising scale and improving unit economics that directly benefit SPOT, independent artists/labels (higher payouts), and ad-tech partners; legacy radio and smaller audio publishers face share loss as advertisers reallocate to measurable, podcast/audio formats. Scale gives Spotify pricing and product leverage (bundled audiobooks, music, video, live) that can compress ARPU-sensitive competitors’ margins over 12–36 months and increase switching costs via feature lock‑in (Prompted Playlists, Page Match). Cross‑asset: stronger growth narrows tech credit spreads, should reduce SPOT equity implied volatility after the print; EUR/USD flows matter (reported in EUR) so FX can amplify revenue volatility vs USD‑based peers.

Risk assessment: Tail risks include EU/UK/US copyright + AI litigation or a major licensing renegotiation that raises content costs by >200–300bps, or regulatory action under DMA/antitrust that forces data/API changes; probability medium but impact high. Timeline: immediate (days) = share price reaction and vol compression; short (weeks–months) = product monetization tests (audiobooks in Premium conversion, Wrapped engagement monetization); long (quarters–years) = AI-driven product moat or adverse licensing outcomes altering gross margin trajectory. Hidden dependencies: revenue tied to label deals and ticketing partners; gross margin gains could be partially one‑off (ad seasonality, cost timing) so monitor recurring margin net of royalties.

Trade implications: Tactical long bias in SPOT sized 2–3% of equity risk budget given 12‑month upside potential 20–35% if conversion of new features sustains ARPU, with a 18–22% stop; hedge with 6–9 month 5–8% OTM puts. Options: buy 12–18 month LEAP calls ~10–20% OTM (costly but asymmetric with AI/product optionality) or implement call‑calendar to monetize expected front‑loaded vol decay. Pair trade: long SPOT vs short Audacy (AUD) or iHeart (IHRT) sized beta‑neutral to capture audio ad share shift over 6–18 months. Rotate 3–5% portfolio weight into digital media/AI content platforms, trimming legacy radio/linear TV exposures.

Contrarian angles: Consensus highlights growth but underestimates three risks — conversion of MAU engagement to sustainable ARPU, licensing cost inflation from AI‑driven value re‑capture, and potential overinvestment diluting margins. The market may underprice audiobook upside and Page Match network effects; long‑dated options could be underpriced if Spotify captures book/audio commerce (physical book sales via Bookshop.org) — a non‑linear revenue stream. Historical parallel: early Netflix secular growth with content cost risk—Spotify can both scale and see cost unpredictability; size positions to reflect binary licensing outcomes and use hedges to protect against regulatory shocks.

Key Decisions for Investors

• Establish a 2–3% long equity position in SPOT within the next 1–4 weeks; target 12‑month upside 20–35%, set a hard stop at 18–22% downside or hedge with 6–9 month 5–8% OTM puts to limit tail risk from licensing/regulatory events.
• Buy 12–18 month LEAP calls on SPOT ~10–20% OTM (size 0.5–1% notional) to capture asymmetric upside from AI/product rollouts; if premium is high, execute a call‑calendar (sell shorter calls) to finance time decay exposure.
• Initiate a beta‑neutral pair trade: long SPOT / short AUD (Audacy) or IHRT (iHeart) sized to neutralize market exposure (trade size ~1–2% net), aiming to capture audio ad share shift over 6–18 months.
• Reduce exposure to traditional radio/linear TV ad names by 3–5% and rotate into digital media & creator platform names (SPOT, parametric exposure to AAPL services, GOOGL YouTube audio) over the next quarter; monitor conversion KPIs (audiobook attach rate >2–3% of MAUs, premium ARPU growth >3% YoY) before adding.
• Monitor regulatory and licensing catalysts closely: track EU DMA developments, any major label contract renegotiations, and AI copyright litigation over the next 60–180 days; if adverse regulatory outcomes materialize (e.g., licensing cost increase >200bps), trim SPOT position by 50% within 10 trading days.