Spotify: Positioned for a Massive Acceleration.

Q2 2025 ER Digest

This is an update of my original Spotify thesis. Spotify is one of the six companies that I hold in my portfolio and my Spotify investment is up over six fold.

Spotify is a machine that maximises user lifetime value by optimising the user experience over the time. The rate at which Spotify optimises the latter is about to go through an inflection point.

Three key datapoints from the Q2 2025 earnings call suggest Spotify’s value creation process is about to accelerate tremendously:

1. Video consumption is growing 20 times faster than music consumption since the year 2020.

2. Spotify is retooling its tech stack to build with natural language, leveraging Generative AI.

3. Spotify is now positioned to become a Singularity Scaler, having now acquired a new dataset that is far richer in signals than its previous dataset.

Spotify’s business is about acquiring more users and making more money per user over the long term: both come down to optimising the end user experience better than competitors. Video and vibe-coding promise to greatly speed up Spotify’s user growth and pace of iteration, which should accelerate the pace at which Spotify creates shareholder value considerably. Further, point #3 means Spotify now gets much richer signals from users, which is about to drastically increase the quality of Spotify’s iterative process. Up 6.5X on my Spotify investment, I believe these three developments alone likely single-handedly take my Spotify pick into the multi deca-bagger domain.

Spotify CPO Gustav Söderstrom’s remarks during the Q2 2025 earnings call showcase how Spotify’s pace of iteration is about to go through an inflection point:

So maybe I'll talk a little bit more about what investments we're making. We are really retooling the entire company and the entire technology stack for generative age.

Concretely, this means that you wrap all the APIs and something called MCPs, model context protocols, so that you can have an agentic infrastructure on top of all your old school tech infrastructure so that you can basically create a product on the fly by just writing something in English.

The market was disappointed with Spotify’s Q2 2025 financials, with the stock dropping over 10% yesterday - but this is because the market doesn’t understand Spotify’s value creation process. As I’ve said many times, in the network-defined economy scale precedes profits in the list of strategy priorities by a long-shot. Sometimes, Spotify is presented with an opportunity to obtain outsized user acquisition and retention gains per dollar invested - in such scenarios and in the pursuit of long term value creation, it makes a lot more sense to invest rather than prioritise short term financial performance.

Q2 presented such an opportunity and Spotify capitalised on it, with net MAU additions coming in at record levels for Q2, exceeding guidance by 7 million and with paid subscribers exceeding guidance by 3 million. During the Q2 2025 earnings call, Spotify CEO Daniel Ek beautifully explained how Spotify navigates the tradeoff between investing and generating profits:

Now the most important thing for you as investors to be thinking about this, though, is that we don't try to optimize for reaching an arbitrary goal. Instead, the #1 thing that we're really actively focused on is driving that lifetime value metric that I talked about.

And that includes the trade-off between short-term investments and long-term investments. And obviously, if there are long-term investments, those should be discounted back quite heftily. But if it still makes sense to do it, then we should do it.

So let me give you an example. Perhaps this is the clearest example. Let's take marketing as one example. So one of the ways we measure marketing is SAC to LTV ratio. So SAC stands for subscriber acquisition cost and then you have the LTV, which, of course, is lifetime value. And the way to think about that is it's a ratio. And so you could imagine the SAC to LTV, if it's 2:1, it will elicit one type of response from Spotify. But let's hypothetically say that it will go to 5:1, meaning for every dollar we invest in marketing, we get $5 back.

If you're an investor, you should feel very happy for us to invest irregardless of if that means that we will have short-term impacts on expenses for that -- if you had a high degree of certainty that we were actually going to get $5 back.

Finally, the onset of the AI DJ feature now has users talking to Spotify in natural language. This means Spotify now gets to understand what users want much better, because they now tell Spotify directly. Previously, Spotify was confined to obtuse signals like how and when users were skipping songs, for example. Further, this means that Spotify’s earning power is set to increase in tandem the scaling of AI laws (the definition of a Singularity Scaler), because as LLMs get better so will Spotify’s ability to convert signals into value and at a decreasing cost over time.

As LLMs get better, users will interact with AI DJ more, which will afford Spotify more signals. It will also improve Spotify’s ability to process the signals and to finally convert them into value, by tweaking the user experience. Spotify CPO Gustav Söderstrom shared during the Q2 2025 earnings all that Spotify’s previous AI infrastructure had peaked and that he now sees LLMs scaling infinitely and positioning Spotify to win big time, since Spotify has the most scale (and therefore, the most and highest quality data):

One last thing that I want to leave you with is that I talked about the difference between the non-generative AI age and the generative AI age, and I talked about how these products are now self-improving.

I just want to emphasise that in the old world of recommendations, the deep learning-based world, making the models bigger and having more users and more usage actually did not improve those models. They had peaked out in terms of performance.

So when you hear AI people talk about the scaling loss, what they mean is that LLMs, unlike the previous deep learning systems, they get better so far infinitely as you add more data and more usage.

So this creates an interesting dynamic where the application that has the most engagement gets better the fastest, and we think we're very well positioned because we have the most engagement. So that's maybe the most strategic impact of this technology to us.

Thus, while the market is once again heavily focused on Spotify’s short term financials, my view is that Spotify’s value creation process is going to accelerate dramatically over the next year and that further shareholder returns shall ensue. I welcome management’s focus on long term value creation, prioritising investments over short term financial performance when opportunities arise.

Until next time!

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