Spotify's Q2 Earnings Plunge: An Opportunity or Ominous Signal?
In 2025, music streaming giant Spotify Technology (NYSE: SPOT) has been among the most resilient growth stocks in the market.
Throughout the year, Spotify’s cumulative return has never fallen into the red, and as of the July 28 close, shares were up nearly 57%. However, the company’s latest earnings have put a significant blemish on the stock’s otherwise incredibly strong showing.
On July 29, Spotify reported disappointing Q2 results that caused shares to close down over 11%. Below we’ll break down the report and gain an updated outlook on shares of Spotify. Could the results be an ominous sign of things to come, or are they simply a blip on the radar in the communication stock’s long-term path to further appreciation?
User Growth Surges, but External Factors Pressure Profit
In Q2, Spotify’s monthly active users (MAUs), a key performance indicator, increased by 18 million. This significantly surpassed the company’s guidance of 11 million additions.
Revenue increased by 10% year-over-year (YOY) to approximately $4.56 billion, slightly missing expectations, largely due to foreign exchange headwinds. However, 15% constant currency revenue growth met expectations. Notably, Premium Subscribers increased by eight million to 276 million, beating guidance by three million. Gross margins also improved to 31.5%, matching expectations.
However, earnings and Q3 guidance were where the company really missed the mark.
Spotify reported a diluted loss per share of approximately 49 cents compared to a gain of $1.33 a year ago. The company attributed this swing largely to a nearly double increase in “social charges," i.e., payroll taxes linked to share-based compensation. Because Spotify does most of its business outside the United States, it is subject to social charges in many countries that fluctuate based on its stock price. As shares have moved up significantly, so have social charges, putting a damper on the company’s results.
Q3 revenue guidance also disappointed analysts, even though the company said it expects to add 14 million MAUs and five million Premium Subscribers.
On the positive side, MAU and Premium Subscriber growth exceeded expectations. These metrics are the most important for the firm’s long-term success. An expanding customer base creates greater opportunities to drive higher future revenues. In addition, the company’s free cash flow still spiked by 43%, marking a Q2 record.
Although Spotify is dealing with near-term challenges, the firm’s long-term outlook remains in great health overall.
Ads Business Needs Improvement; 2026 Could Bring It
Like video streaming leader Netflix (NASDAQ: NFLX), the potential for increased advertising sales has excited investors. This is particularly true for Spotify, as it has been looking to push ad monetization through both its free and paid plans.
However, the Q2 results in this vertical were far from what investors wanted to see. Reported ad sales dropped 1% YOY, although they rose 5% in constant currency. Either way, the ads business is currently falling short of expectations.
Spotify CEO Daniel Ek's comments didn’t comfort investors. Ek said he was “unhappy” with the progress the company had made in its push to generate higher advertising revenues.
Still, Spotify previously noted that 2025 is a “transition” year as the company works to integrate its new ad tech platform. As such, the company expects 2026 to be when the ads business is “really going to get to scale."
The fact that Spotify’s monthly active advertisers increased by 40% from the prior year is a good sign. This indicates that ad inventory is rising, an important step to driving future revenues. However, ad inventory is currently dropping in podcasting as the company transitions its monetization approach in this part of the business.
When adjusting for these effects, the company reported low double-digit ad revenue growth. This is a key takeaway for investors, as it provides a better indication of the company’s future ad growth prospects. There continues to be strong reason to believe Spotify’s ad business can become a much more significant contributor over time. This reinforces the bullish case around the stock.
Spotify’s Big Fall: A Buy-The-Dip Opportunity?
Overall, despite the fall in shares, Spotify remains well-positioned going forward. It's important to consider that while the profit miss was significant, it was driven by factors largely out of the company’s control, namely social charges and foreign exchange movements.
Still, the results could mean that the stock will face analyst downgrades and near-term pressure. However, in the longer term, the substantial drop in shares could also be a relatively attractive buy-the-dip opportunity.
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