We came across a bullish thesis on Spotify Technology S.A. (SPOT) on Substack by Kroker Equity Research. In this article, we will summarize the bulls’ thesis on SPOT. Spotify Technology S.A. (SPOT)'s share was trading at $549.17 as of April 14^th. SPOT’s trailing and forward P/E were 87.92 and 51.55 respectively according to Yahoo Finance.

Over the past year, Spotify has undergone a significant transformation, evolving from a high-growth but profit-challenged streaming platform into a profitable, cash-generating business. With over 675 million monthly active users and 263 million Premium subscribers, the company closed 2024 with a net income of €1.14 billion and operating income of €1.365 billion—marking its first full year of profitability. This milestone reflects the culmination of strategic shifts in pricing, cost discipline, content realignment, and monetization improvements that have propelled Spotify into a new phase of maturity. The company’s consistent user growth—up from 489 million in 2022 to 675 million in 2024—and its ability to convert a rising portion of that base into paying customers (Premium subscribers rose 11% in 2024) underscores its continued global traction. Revenue growth has been robust, increasing to a record €15.67 billion in 2024, aided by both subscriber growth and an uptick in average revenue per user, thanks to well-timed price increases across major markets. Crucially, Spotify executed these price hikes without seeing churn, indicating strong product-market fit and user loyalty.

Equally important is the improvement in profitability metrics. Gross margins, long stuck in the mid-20s, climbed to 30% in 2024. This was driven by multiple factors: tighter cost controls in the podcasting division, better ad monetization, and pricing leverage. After years of heavy investment in unprofitable podcast studios and celebrity deals, Spotify cleaned house—shuttering underperforming operations, reducing headcount, and shifting toward a more focused content strategy. The ad-supported tier, previously near breakeven, delivered a 12% gross margin in 2024, aided by advances in dynamic ad insertion and self-serve ad tools. Meanwhile, operational efficiencies—including layoffs of over 1,500 employees and reduced marketing spend—created meaningful operating leverage. This helped turn a €659 million operating loss in 2022 into a €1.365 billion operating profit in 2024, pushing Spotify’s operating margin into positive territory at 8.7%.

Perhaps the most striking change has been Spotify’s shift from a cash-neutral business to a free cash flow powerhouse. Free cash flow was essentially flat in 2022 at just €21 million, but rose to €678 million in 2023 and surged to €2.285 billion in 2024—a nearly 4x year-over-year increase. Given the company’s low capital intensity and improving margins, this level of cash generation gives Spotify flexibility to reinvest in growth, strengthen its balance sheet, or return capital to shareholders. While the long-term ceiling for gross margins may be capped due to the structural reality that ~70% of music revenue is paid out to rights holders, Spotify is demonstrating it can still scale profitably. The bullish case is clear: Spotify has proven it can be both growth-oriented and profitable. The bearish counterpoint is that future margin gains may be limited unless new high-margin verticals like audiobooks or creator tools gain traction. Nonetheless, after years of skepticism about its ability to monetize at scale, Spotify’s 2024 performance has validated its business model and reset expectations. The company is not just surviving in a competitive space, but thriving—and with optionality to unlock even more value ahead.

Spotify Technology S.A. (SPOT) is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 101 hedge fund portfolios held SPOT at the end of the fourth quarter which was 98 in the previous quarter. While we acknowledge the risk and potential of SPOT as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than SPOT but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article was originally published at Insider Monkey.