Morgan Stanley reiterates Spotify Overweight and raises target price to $640

Overview

This report is Morgan Stanley's company research on Spotify Technology SA. Its core action is to reiterate Overweight and raise the target price from $610 to $640. The report believes that despite SPOT shares being down approximately 14% year to date, the company remains a leading global audio platform. Product diversification, free-tier improvement, Marketplace growth, improving podcast profitability, early Audiobooks+ momentum, and potential AI tool launches collectively support medium- to long-term growth.

Core views

The core view is that Spotify remains in the early stages of the user penetration and monetization S-curves: only approximately 3.5% of the global population pays for Spotify, while US paid penetration remains below 20%. The report forecasts 25%-30% EBITDA CAGR and approximately 20% FCF CAGR over the next 3-5 years, and believes there is a path to approximately $35 of FCF per share by 2030. In the near term, investors are concerned about one-time gross margin pressure in 3Q, product launch cadence, and valuation linkage with NFLX, but the report believes revenue reacceleration, margin expansion, and catalysts from AI-related record-label agreements will drive the share price higher.

Analysis framework

The analytical framework combines company investor-day disclosures, Morgan Stanley ModelWare financial forecasts, Refinitiv consensus estimates, credit card transaction panel data, subscriber and ARPU forecasts, FCF multiple valuation, and bull/bear scenario risk-reward analysis. The target price is rolled forward to mid-2027, with the base case using approximately 29x forward FCF, the bull case approximately 30x forward FCF, and the bear case approximately 18x 2027 FCF.

Methodology notes

• Financial forecastsMorgan Stanley ModelWare

  Company model forecasts

  The report states that unless otherwise noted, core financial metrics are based on the Morgan Stanley ModelWare framework, incorporating the latest 10Q disclosures and updated foreign-exchange assumptions.

• Consensus estimatesRefinitiv Estimates

  Market consensus estimates

  The report uses Refinitiv Estimates as the source of consensus data to compare Morgan Stanley's forecasts with market expectations.

• Alternative dataCredit and debit card transaction panel

  Approximately 9 million US card transaction samples

  The report uses a panel of approximately 9 million US credit and debit cards to analyze churn changes following price increases, while noting that the data do not cover cash, ACH, checks, or other payment methods and that churn identification is subject to uncertainty from brand attribution and card replacement.

• Valuation methodsRisk Reward / FCF multiple

  Target-price scenarios based on forward free cash flow multiples

  The $640 base-case target price corresponds to approximately 29x forward FCF; the bull-case target price is $780 and the bear-case target price is $375, used to assess 12-month risk-reward.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• SPOT.US

  Core covered asset

  Strengths

  Global audio-platform leader with strong user engagement. Premium, free tier, Podcasts, Audiobooks+, Marketplace, and AI tools form a product expansion portfolio, while credit card data support its pricing power.

  Weaknesses

  Near-term user conversion may be delayed by free-tier improvements; 3Q gross margin is affected by one-time regulatory fees; and some new businesses still need to demonstrate scalable profitability.

  Comparison

  The report believes Spotify has superior growth characteristics relative to peers, making the approximately 29x forward FCF implied by the $640 target price reasonable.

  Risks

  Supplier concentration among record labels and other providers, large-tech competition, limits on price increases, near-term earnings pressure from investment in new verticals, and global subscription growth below expectations.

Key data

• RatingOverweightThe report reiterates its Overweight view.
• Target price$640.00Raised from $610 to $640.
• Current share price$499.94Closing price as of 2026-07-31.
• Implied upsideApproximately 30%Based on the $640 target price and the $499.94 current price.
• Bull/base/bear scenarios$780 / $640 / $375Approximately 55% upside in the bull case and approximately 25% downside in the bear case.
• 2026/2027 Premium net adds26 million eachThe report expects strong MAU growth to ultimately convert into paid users.
• 2028E Premium subscribersApproximately 365MRisk-reward base-case assumption.
• 2028E MAUApproximately 945.4MDisclosed in the key earnings input table.
• 2028E Premium ARPU€5.42Gradually increases from €4.63 in 2025.
• 3-5 year EBITDA CAGR25%-30%Driven by product expansion, user growth, pricing, and margin improvement.
• 3-5 year FCF CAGRApproximately 20%The report believes FCF could reach approximately $35 per share by 2030.
• Long-term investor-day targetsMid-teens revenue growth, 35%-40% gross margin, 20%+ operating marginFrom Spotify's recent investor-day disclosures.
• Audiobooks+Annualized recurring revenue could reach $100mm in JulyThe report views the business as still early-stage but exhibiting strong momentum.

Impact & implications

For investment implications, the report positions Spotify as a high-quality platform asset with global scale, strong user engagement, and substantial multi-product monetization potential. If free-tier improvements continue to expand the funnel, price increases maintain low churn, and Marketplace and non-music content drive gross margin expansion, SPOT's valuation could receive dual support from growth and profitability. However, slower subscriber conversion, increased supplier bargaining pressure, or large-tech competition limiting price increases could pose downside risks to the target price and rating.

Risks

• Spotify's supplier structure is concentrated, and record-label licensing renewal terms could affect gross margins.
• Large technology competitors may use interactive music as a loss-leading customer-acquisition business, limiting industry pricing potential.
• Investment in new revenue verticals and product innovation may weigh on near-term profitability.
• Free-tier improvements could temporarily delay conversion from free users to Premium subscribers.
• The launch cadence of new tools such as AI remixing and agreements with record labels remain uncertain.
• The credit card panel data represent only a US sample and are subject to limitations in payment-method coverage, brand attribution, and card-replacement identification.

What to watch

• The progress of new product and AI feature launches over the coming months, particularly the GenAI remixing tool.
• Progress on licensing agreements with additional record labels beyond UMG for AI tools.
• Whether 2Q Premium net adds reach approximately 6 million and whether 3Q guidance accelerates to approximately 6.5 million.
• 2Q gross margin of approximately 33.1% and gross margin performance in 3Q after the impact of one-time regulatory fees.
• Whether Premium net adds can remain at 26 million each in 2026 and 2027.
• Whether churn following price increases remains below historical cycles.
• The contribution of Marketplace, Podcasts, Audiobooks+, and the advertising business to gross margin expansion.