Key insights
- Spotify's Q1 earnings beat expectations with a 33% gross margin, validating its business model. However, the stock sold off due to Q2 guidance indicating a flat margin and slower subscriber growth. The market is now focused on accelerating growth, which Spotify's current outlook doesn't provide. Weak ad revenue growth also contributed to the negative sentiment. Market expectations have shifted from profitability to rapid growth, leading to a re-evaluation of Spotify's potential.
Spotify’s Q1 numbers today looks like a blowout on paper.
MAUs hit 761M, Premium subs are at 293M, and revenue grew 14%. But the number that everyone has been waiting years for finally showed up: 33.0%. That’s their gross margin.
For the longest time, the bear case on SPOT was that they were just a middleman for the music labels and would never have real platform economics. 33% is the second-highest they've ever printed and basically proves the model works.
So why the selloff?
Tbh, I think it's because the "easy" money has been made on the re-rating. We’ve gone from "will they ever be profitable?" to "how fast can they compound?".
When you look at the Q2 guide, it’s good, but it’s not breakout good. They’re guiding to 33.1% margin (flat-ish) and 299M subs. It feels more like a continuation than a new acceleration. The market already priced in the shift from "unprofitable scale" to "profitable platform," and now it’s looking for the next steepening of the curve that just isn't there yet.
Also, the ad business is still a bit of a weak leg—revenue there only grew about 3% while Premium revenue grew 15%. It's not breaking the thesis, but it's a reminder that it's not every engine firing at once.
Basically, the market isn't rewarding them for being better than last year anymore. They're being judged on whether the forward curve is getting steeper, and right now, it looks like a steady (but predictable) climb.
If you want the full breakdown, including the ARPU growth and the social charge "noise" in the operating income, my note is here: https://dullbusiness.substack.com/p/spot-q1-2026-spotify-improved-but