Morgan Stanley is staying bullish on Spotify (SPOT), reiterating an overweight rating and a $590 price target, implying more than 30% upside from current levels. The firm’s note, titled “Investor Day Preview: Don’t Stop Believing,” argues that Spotify has earned significantly more credibility with investors than it had at its last major investor outlook event in 2022.
Spotify is already up 16% on May 21 as of 1:30 p.m. EST, following its Investor Day, where management shared plans for how the company will reach 1 billion subscribers.
Spotify just asked investors to believe in another big investment cycle. This time, it’s AI. Morgan Stanley is bullish that Spotify will deliver.
Spotify is delivering on increasing profitability
Morgan Stanley’s core argument is simple: Spotify said it would hit ambitious margin and profitability targets back in 2022, according to QuiverQuant. And it did, ahead of schedule.
At the time, the company outlined medium-term gross margin and EBIT margin targets of 30% and 10%, respectively, and the market was skeptical. Spotify hit both within two to three years.
Spotify’s recent Q1 earnings made profitability the center of the story. Revenue rose 14% year over year to €4.5 billion, gross margin reached 33.0%, operating income climbed to €750 million, and free cash flow hit €824 million.
Those numbers matter because Spotify now has enough scale for incremental efficiency to drive outsized earnings growth. With 293 million premium subscribers, margin improvements can move operating income and cash generation more than subscriber growth alone.
The next test will be to see whether Spotify can hold gross margins above 33% while continuing to fund AI and product development. If it does, margin expansion could become a structural earnings driver with room to push the model toward the mid- to high-30% range over time.
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Spotify’s premium pricing is holding without churn
After Spotify’s January U.S. price increase, premium ARPU rose 5.7% year over year in Q1, with guidance pointing to 7% to 7.5% growth in Q2. Management flagged no surprises in churn.
The combination of rising ARPU with stable retention across a base of 293 million subscribers is another reason Morgan Stanley is bullish about Spotify’s unit economics.
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The significance is straightforward. If ARPU rises faster than subscriber growth and retention stays steady, Spotify expands revenue and gross profit per user across a very large installed base.
With 293 million premium subscribers, even modest pricing gains can deliver meaningful incremental revenue with attractive economics.
Ad automation offers a second profit lever
Advertising remained Spotify’s weakest segment in the first quarter, but the business is starting to show a clearer path to improvement. Ad-supported revenue grew about 3% year over year, while management said automated and biddable ad buying now makes up more than 30% of ad revenue.
Spotify’s free tier reaches hundreds of millions of users but has historically generated relatively low profit per user. Automated ad systems help advertisers buy ads more efficiently, improve how often ad space gets filled, and allow Spotify to extract more value from that audience.
Morgan Stanley has argued that stronger automation should improve yield and scalability over time. If that happens, Spotify gains a second profit lever and a more diversified earnings model. If ad growth stays near 3%, subscriptions remain the main engine for both growth and margin.
What could drive upside for Spotify
- Price increases raise revenue per user and support profit growth, even if subscriber additions slow.
- Higher gross margins allow more revenue to flow into operating income and free cash flow.
- Stable retention after price hikes strengthens confidence in future pricing power.
- Automated ad buying improves inventory pricing and monetization of Spotify’s free-user base.
- Operating leverage alongside continued AI investment suggests margins are improving structurally.
Potential risks for Spotify stock
- Higher royalty or content costs could absorb pricing gains and pressure margins.
- New premium features may fail to deepen engagement enough to support future price hikes.
- Advertising monetization could remain weaker than expected within the free tier.
- Product and AI investments may outpace efficiency gains and weigh on profitability.
- Competitive bundling from larger platforms could weaken Spotify’s pricing power.
Key takeaways for Spotify
Spotify is generating stronger profitability through pricing power, operating leverage, and margin expansion. First-quarter results showed rising operating income, expanding gross margins, and strong free cash flow generation as the company scales more efficiently.
Spotify is also improving ad monetization through automation and better ad-tech infrastructure. Continued margin expansion alongside product investment could strengthen confidence in Spotify’s long-term earnings and cash flow potential.
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