Spotify's stock took a hit on Tuesday after the music streaming giant reported second-quarter results that left Wall Street wanting more. The company posted earnings of $3.03 per share, missing the analyst consensus of $3.29, and revenue of $5.554 billion (4.78 billion euros) came in just shy of the $5.600 billion expected.

The Financial Times pointed to increased spending on marketing and artificial intelligence as the culprits behind the profit pressure, raising questions about whether Spotify can keep its growth engine humming as the streaming market matures.

User Growth Keeps Rolling

Despite the earnings miss, Spotify's user base continues to expand. Monthly active users grew 12% year over year to 777 million, though net additions of 16 million were slightly below the company's own guidance of 17 million. Premium subscribers rose 9% to 300 million, with net additions of 7 million. Average revenue per premium user climbed 7% to 4.89 euros, while ad-supported revenue inched up 1%.

Margins Improve, But Costs Rise

Here's the silver lining: gross margin expanded by 193 basis points to 33.4%, beating the company's guidance, thanks to improvements in both the premium and ad-supported segments. Premium gross margin hit 34.9%, and ad-supported gross margin improved to 19.1%.

Operating income surged 61% year over year to 655 million euros, translating to an operating margin of 13.7%. But adjusted operating expenses also jumped 19% to 941 million euros as Spotify poured money into marketing and AI initiatives aimed at fueling future growth.

The company ended the quarter with 9.4 billion euros in cash and short-term investments, generated 797 million euros in free cash flow, and employed 7,302 people.

Spotify is betting on a mix of higher-priced subscription tiers, early concert-ticket access, AI-powered remix tools, and AI-generated podcasts to drive its next phase of growth.

What's Next for Q3?

Looking ahead, Spotify expects third-quarter revenue of 5.0 billion euros (about $5.813 billion), slightly above the analyst consensus of $5.770 billion. Premium subscribers are projected to reach 305 million, implying net additions of about 5 million. However, monthly active users are expected to hit 788 million, below the 793 million analysts were looking for.

The company also forecasts a gross margin of approximately 32.9% and operating income of about 670 million euros, including roughly 9 million euros in social charges tied to share price assumptions at quarter-end.

Investor Day Highlights

At its recent investor day, Spotify revealed it has captured about 20% of the U.S. audiobook market and that global streaming hours per subscriber increased 10% between 2021 and 2025. More than 3% of the global population now pays for Spotify, and over 500 million users have streamed a video podcast.

Management reaffirmed its 2030 targets of 35% to 40% gross margin, operating margins above 20%, and 1 billion subscribers.

SPOT Price Action: Spotify Technology shares were trading 1.81% lower at $477.54 at the time of publication on Tuesday, according to market data.