Spotify Downgraded to Accumulate With Unchanged Target Price of US$650 as AI Transforms Risk Into Growth November 2, 2026
Brief Overview
Spotify Technology S.A. reported 3Q26 revenue growth of 16% year-on-year, primarily driven by stronger Premium revenue growth of 17% year-on-year, supported by both subscriber growth and higher average revenue per user. 3Q26 profit after tax and minority interests underperformed slightly due to lower net finance income, driven by higher foreign exchange losses and a higher effective tax rate. User growth remained resilient, with monthly active users reaching 788 million, up 11% year-on-year, while Premium subscribers increased to 306 million, up 9% year-on-year.
Investment Positives
Strong Premium Growth Supported by Subscriber Additions and Pricing Power
Premium revenue grew 17% year-on-year, driven by 9% subscriber growth and 7.5% ARPU expansion. Premium subscribers reached 306 million, adding 6 million quarter-on-quarter and exceeding guidance by 1 million. We view the resilience in Premium subscriber additions despite price increases positively, reinforcing pricing power as Spotify’s key growth lever. Notably, Spotify has implemented three US price hikes since 2023 with minimal disruption to subscriber growth. Management guided for a further 10 million Premium subscriber additions in 4Q26e.
Advertising Momentum Improving Following Platform Revamp
Advertising revenue growth accelerated to 9% year-on-year in 3Q26, from 3% in each of the previous two quarters, reflecting early benefits from Spotify’s ongoing rebuild of its advertising technology stack. Growth was primarily driven by automated biddable channels, which now account for 40% of advertising revenue, up from 30% in 3Q25, alongside growing podcast sponsorships. Management expects advertising growth to continue accelerating towards double digits in 4Q26e. Spotify’s 499 million ad-supported MAUs represent 63% of total MAUs but generate only 10% of total revenue. The analyst sees substantial monetisation potential in this gap, for example through a lower-priced ad-free subscription tier.
Navigating the AI Risk Well
Spotify is addressing AI-related risks through partnerships with major record labels, including Sony, Universal Music Group and Warner Music Group, to develop responsible AI products, alongside tighter policies against unauthorised AI voice cloning and AI-generated spam. Meanwhile, integrations with AI platforms such as ChatGPT, Claude and Meta’s Muse help Spotify maintain its relevance as AI reshapes music discovery. Continued expansion into audiobooks, creator tools and the Partner Programme also diversifies its offering beyond music, strengthening user engagement and reducing reliance on traditional music streaming. We believe Spotify is turning AI from a disruption risk into a growth and monetisation lever.
Investment Challenges
We did not identify any material negatives in the 3Q26 results.
Outlook
For 4Q26e, Spotify guided for 15% year-on-year revenue growth, driven by user growth and the conversion of free users to paid subscriptions. MAUs will continue to grow at 9% year-on-year, adding 30 million new users in 4Q26e. Management expects double-digit advertising growth in 4Q26e as biddable channels continue to scale.
With 306 million Premium subscribers and 788 million MAUs, Spotify can leverage its scale and proprietary Large Taste Model to enhance personalisation, improve content discovery and unlock new revenue streams. Stronger user engagement, differentiated Premium features and improved monetisation should reinforce pricing power. AI-creation tools, audiobooks and other products with higher average revenue per user broaden the path for mid-teens revenue growth and further monetisation, extending Spotify’s lead as the world’s largest audio platform.
Recommendation and Target Price
Phillip Securities Research downgrades Spotify from Buy to Accumulate with an unchanged target price of US$650. The downgrade is due to recent share price movement. The analyst’s estimates remain unchanged, with a weighted average cost of capital of 7.5% and a terminal growth rate of 3.5%.
Frequently Asked Questions
Q: What is Phillip Securities Research's recommendation for Spotify?
A: The analyst downgrades the recommendation from Buy to Accumulate with an unchanged target price of US$650.
Q: How did Spotify's revenue perform in 3Q26?
A: 3Q26 revenue grew 16% year-on-year, primarily driven by Premium revenue growth of 17% year-on-year.
Q: How many MAUs and Premium subscribers does Spotify have?
A: MAUs reached 788 million, up 11% year-on-year, while Premium subscribers reached 306 million, up 9% year-on-year.
Q: How is Spotify handling the AI disruption risk?
A: Spotify is partnering with major record labels to develop responsible AI products, tightening policies against unauthorised AI voice cloning and AI-generated spam, and integrating with AI platforms such as ChatGPT, Claude and Meta's Muse.
Q: What is the outlook for advertising revenue?
A: Advertising revenue growth accelerated to 9% year-on-year in 3Q26, with management expecting double-digit growth in 4Q26e as automated biddable channels continue to scale.
Q: What is Spotify's 4Q26e guidance?
A: Spotify guided to 15% year-on-year revenue growth, 30 million new MAUs and double-digit advertising growth in 4Q26e.
Q: Why was the recommendation downgraded?
A: The downgrade from Buy to Accumulate was due to recent share price movement; the target price remains unchanged at US$650.
Q: What is the monetisation potential for ad-supported users?
A: Spotify's 499 million ad-supported MAUs represent 63% of total MAUs but generate only 10% of total revenue, indicating substantial monetisation potential.
This article has been auto-generated using PhillipGPT. It is based on a report by a Phillip Securities Research analyst.
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About the author
Helena Wang
Helena covers Hardware/Marketplaces/ETF. Helena graduated with a master's degree in Financial Technology from Nanyang Technological University.
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