Spotify Technology S.A. (NYSE: SPOT) shares dropped sharply today, falling over 6% after the audio streaming giant released its first-quarter 2025 financial results and issued guidance that failed to meet investor expectations. While the company reported record-high operating income and continued robust subscriber growth, a combination of earnings misses, higher costs, and a cautious outlook triggered a swift negative reaction from the market.
Spotify reported operating income of €509 million ($535.6 million), a record for the company but still below its own forecast of €548 million and analyst expectations. The shortfall was largely due to higher-than-anticipated “social charges”, payroll taxes linked to employee compensation which rose as Spotify’s share price increased. These charges totaled €76 million ($80 million) in the quarter, weighing on profitability.
Revenue climbed 15% year-over-year to €4.19 billion ($4.77 billion), just under consensus estimates, and earnings per share came in at €1.07 ($1.22), missing the €2.13 ($2.43) that analysts had anticipated. Despite these misses, Spotify’s gross margin improved to 31.6%, up about 400 basis points from the prior year, reflecting operational improvements.
Premium subscribers grew 12% year-over-year to 268 million, beating both company and analyst forecasts. However, monthly active users (MAUs) reached 678 million, just shy of the 679 million expected by analysts. For the second quarter, Spotify guided to 689 million MAUs and 273 million premium subscribers, both below Wall Street’s expectations of 694 million MAUs and 271.5 million premium subscribers.
The company’s ability to add five million net new premium subscribers in the quarter was notable, especially as it lost two million free, ad-supported users. This shift underscores the company’s focus on higher-margin premium subscriptions, but the overall MAU miss and conservative Q2 outlook left investors concerned about growth momentum.
Looking ahead, Spotify projected Q2 operating income of €539 million ($566.9 million), once again below analyst expectations of €575 million ($605 million). Management warned that payroll taxes tied to the company’s rising share price will remain a headwind in the near term, further pressuring profitability.
Investors have become increasingly sensitive to Spotify’s profitability, especially after years in which the company prioritized growth over margins. Any setback on this front-particularly when coupled with cautious forward guidance-can prompt a sharp selloff, as seen today.
Despite the short-term volatility, CEO Daniel Ek struck an optimistic tone about the company’s long-term prospects. “The underlying data at the moment is very healthy: engagement remains high, retention is strong, and thanks to our freemium model, people have the flexibility to stay with us even when things feel more uncertain,” Ek said. “So yes, the short term may bring some noise, but we remain confident in the long-term story, and the direction we’re heading in feels clearer than ever”.
Spotify’s stock had enjoyed a strong run-up over the past year, more than doubling in value as the company shifted from persistent losses to sustained profitability. However, with the bar set higher, investors are now demanding consistent execution on both user growth and profit expansion. The Q1 earnings miss, elevated cost pressures, and cautious guidance combined to overshadow otherwise healthy engagement metrics, leading to today’s significant stock drop.
As Spotify navigates the balance between growth and profitability, the coming quarters will be closely scrutinized for signs of margin improvement and sustained user momentum. For now, the company remains positioned as a global leader in audio streaming, but the path forward will require delivering on both the top and bottom lines to satisfy increasingly demanding investors.
