Spotify forecasts strong profit as AI features start to pay off, shares surge

By Jaspreet Singh

Oct 22 (Reuters) - Spotify forecast fourth-quarter profit above Wall Street estimates on Thursday, banking on its AI-powered features to drive user growth ahead of the crucial holiday season.

Shares of the Swedish music streaming company rose more than 9% in early trading, hitting their highest since January.

New features such as AI DJ, which curates personalized music mixes with spoken commentary, and prompt-based playlists that let users describe a mood or listening preference to generate tailored selections have helped the company attract users amid the rise of music-generation rivals such as Suno and Udio.

The "About the Song" feature that allows listeners to check out facts and stories about the song was on its way to 100 million users and almost 40 million premium users now listen to mixed playlists, Co-CEO Gustav Soderstrom said on a post-earnings call.

"For the agentic age, we are betting on consumers using many agents, and that Spotify will be by far the best media platform for licensed content inside and across all these agents," he said, adding that listeners are using the service for audio, even if they are interacting with third-party agents like Muse.

Spotify has integrated its services into third-party AI platforms and devices, including OpenAI's ChatGPT, Meta's Ray-Ban smart glasses and Muse AI assistant, allowing users to make requests, while playback remains on Spotify.

"We have admittedly been too cautious on AI's near-term impact, and the results show no damage so far," Pivotal Research Group analyst Jeff Wlodarczak said in a note to clients.

Spotify expects operating income of €820 million ($920.53 million) for the fourth quarter, compared with analysts' average estimate of €813.4 million, according to data compiled by LSEG.

The company's forecast for an increase of about 10 million in premium subscribers for the fourth quarter to 316 million was above expectations of 314.7 million, even as its monthly active users (MAUs) projection of 818 million was marginally below Visible Alpha estimates of 819 million.

The company's total MAUs ticked up 1% sequentially in the third quarter to reach 788 million.

Earlier this week, Spotify announced a licensing deal with music distributor Believe for its upcoming paid tool for fan-made AI covers and remixes. It has signed similar deals with Universal Music Group, Merlin and Kobalt for the tool.

In the third quarter, Spotify's operating income of €672 million came in line with Visible Alpha-compiled analysts' average estimate of €671.8 million.

Spotify has said growth in operating expense will peak in the third quarter and moderate from the fourth quarter, continuing into 2027.

Investors have closely watched the company's profitability as it spends on AI to improve discovery and engagement.

It posted revenue of €4.97 billion in the three months ended September 30, compared with an LSEG-compiled estimate of €4.98 billion. It reported earnings per share of €2.48, compared with estimates of €2.80.

($1 = 0.8908 euros)

(Reporting by Jaspreet Singh in Bengaluru; Editing by Sriraj Kalluvila)