Depths
Grounding pieces. Articles that shape the terrain of the issue—through breadth, rigour, or relevance. These are works that hold structure, offer anchor points, or map something essential.
Depths • Autumn-Winter 2025 • Water
EXPERT WITNESSES IN THE UK COURTS
RECENT CASES
By Andrew Strickland
The Background
Several seminal cases, notably The Ikarian Reefer, developed the responsibilities of expert witnesses in the UK. These have since been enshrined in guidance in civil procedure rules, for both general litigation and also for the family courts.
Witnesses to the fact recount what has happened; they do not deliver opinions. It is the privileged role of expert witnesses that results in the need for a well-developed code of conduct. Expert witnesses of all types give their opinions to the Courts; with that privileged power to sway judicial decisions comes equivalent responsibility.
The responsibility is built upon the foundation of the expert recognising that her first duty is to the Court and not to the client. The expert is required to give full nuanced opinions, including all of those relevant but inconvenient factors which do not support the main conclusions, and which may not assist her client’s case.
There is an inevitable tension between an adversarial legal system, with experts being appointed by each side, and the above duties of judicious objectivity. This tension can be removed by the use of single jointly appointed experts. This is increasingly what happens in both modestly sized shareholder disputes and divorce cases in the UK.
The Adversarial Expert
There have been infamous examples of certain professionals developing reputations as a “hired gun” in contentious litigation. The UK courts take strong objection to expert witnesses being firstly biddable, and then acting as advocates for their clients. It is no part of the role of the expert to take up cudgels in this way. There have been bone-crunching, career-ending decisions given by Judges with regard to such conduct, including in the field of business valuation.
The UK courts have a keen eye for the expert that commits the grave error of advocating for the client. A Judge of the UK Supreme Court stated in May 2022 that cases where experts were admonished for being partisan by the court had occurred far too often in recent years. An expert should give evidence in an independent and impartial way.
In the case of Coldunell Limited and Hotel Management International Limited [2022] EWHC 1290, dealing with a claim for dilapidations on a lease, the Judge commented adversely in respect of one expert: “the exercise [the expert] undertook was that of advocate for “his client” and not that of an independent expert. It follows from the above that I have not been able to place any reliance on [the expert’s] evidence.”
Experts in the UK Courts are required to sign a lengthy declaration as part of each report, containing a series of discrete statements. The statements are broadly to the effect that their work and opinions are accurate, and that they have endeavoured to include those matters that might adversely affect the validity of their opinion. As continuing problems with the conduct of experts arise, the declaration becomes ever longer, as we shall see.
Experts and Other Witnesses
The clear distinction between expert witnesses and other witnesses was evident in the case of FTAI AirOpCo UK and Olympus Airways [2022] EWHC 1362, a case dealing with a dispute over an aircraft lease. A single joint expert in airframes and aircraft engines was appointed; Olympus Airways did not agree with his conclusions. Some of their employees were doubtless very knowledgeable in this specialist field. However, they were not allowed to leap the fence from factual to expert witnesses, regardless of their skill sets. Experts are only allowed by permission of the Court.
Expert Reports Production Lines
The case of Liverpool Victoria and Dr Zahar [2020] EWHC 846 involved a medical expert who brought upon himself bone-crunching, career-destroying criticisms. Dr Zahar carried out medico-legal work for low value personal injury claims. Classic examples would be relatively minor fender-bender traffic accidents. His evidence was that he was able both to examine his patient and to produce a report within 15 minutes. He charged a fixed fee for such work. The average fee was eye-wateringly low at £70 per report (some $78). They were prepared in great volume.
He produced a report stating that a claimant had suffered minor whiplash, but that this was resolved within one week. He then responded to pressure and issued a revised report stating that the injuries would persist for 6 to 8 months. An administrative muddle resulted in the insurers receiving both reports. Dr Zahar, forgetting that he was in a hole and that he should stop digging, then stated that the second report had been produced without his knowledge or consent.
The Court found ten grounds of contempt. The Judge stated: “Your conduct in this case amounts to a fundamental betrayal of the trust placed in you by the court.” Dr Zahar was removed from the UK Medical Register; he also received a suspended prison sentence. These outcomes were therefore severe, but not severe enough in the view of the insurers, who duly appealed.
On appeal of the sentence Counsel for the insurers referred to the privileged position of expert witnesses: “that privileged position rested upon the duty which an expert witness owes to the court, and an expert witness who abuses that privileged position by lying should expect to be treated more severely than a member of the public who tells lies to a court.”
An outcome of this case that has affected all expert witnesses in the UK is an additional paragraph added to the mandatory declaration: “I understand that proceedings for contempt of court may be brought against anyone who makes, or causes to be made, a false statement in a document verified by a statement of truth without an honest belief in its truth.”
Another example of a production line of expert reports was that of Bux and GMC [2021] EWHC 762. In this case Dr Bux produced reports in respect of food poisoning experienced by holiday makers at hotels in Mediterranean and other resorts, invariably on the instructions of the same legal firm.
The Judge described these reports as superficial, unanalytical, devoid of any differential diagnosis and invariably supportive of the claim. The conclusions of the reports used largely the same language describing inadequate food preparation and food handling at the hotel concerned.
The primary cause of the action against Dr Bux was a failure to disclose a conflict of interest: his wife worked at the instructing legal firm.
Dr Bux also dug his problems deeper at the bottom of the hole by making untrue statements to the General Medical Council. He was removed from the Register.
Power and Responsibility
Cases through the UK Courts continue to remind us all of responsibilities which come with the power of being an expert witness: in the 2018 case of Ruffell and Lovatt, heard in the Winchester County Court, a Judge was scathing of the views of a rather too dogmatic witness, the Judge stated: “I regret that I have been driven to the firm conclusion that his expert evidence in this case is so flawed that I cannot rely on any contentious aspect of the same.” In addition to the expert having views that were too fixed and firm, regardless of changing information, he was also too adversarial: “The contrast between Dr J’s determined advocacy of the claimant’s position and the more considered and balanced evidence of the other three medical experts was striking.” The expert’s third offence was his dismissive and curt lack of courtesy when commenting on the views of other experts. The Judge described these comments as “at best off-hand, at worst, rude.”
The Use of Assumptions
It can be a requirement for an expert to make assumptions in order to reach conclusions. In the 2017 case of Riva Properties Limited and Foster and Partners, the world-renowned architects were sued by a client seeking to build a 5-star hotel near Heathrow Airport. It was a pivotal aspect of the case to establish if the hotel could have been built for £100 million. Opposing experts agreed to prepare schedules of costs; one of the experts then resiled from this agreement, on the basis that this would require him to make assumptions. He stated that assumptions were unsafe as he was not the designer of the scheme. The Judge did not accept this position: the careful use of assumptions can be central to the role of an expert. The Judge rather acidly concluded: “I cannot avoid reaching the conclusion that he chose not to do so because he feared the answer to the exercise would harm the case being advanced by Fosters.”
Experts and the Nature of Goodwill
Moving away from the travails of the medical profession, the next case is one involving business valuation: CSB 123 Limited and Caroline Stanbury [2021] EWHC 2506. A liquidator brought the case, maintaining that a valuable business, Style Council, had been wrongfully extracted from the insolvent company shortly before its demise.
There was a sharp contrast between the two experts in the eyes of the Judge. He described one of the expert’s reports as being of “very poor quality”. The expert tried to justify himself, in lame tones, by stating that “it was a valuation done ‘at a high level’”. He also stated, rather plaintively: “I didn’t go into extensive detail given my instructions and budget.”
The Judge’s conclusion was that his report “was an unimpressive, results-driven piece of work. His attempts to defend it in oral testimony were wholly unpersuasive.” The expert was also found to have failed in his duty to assist the court.
There was also an element of ipse dixit in the evidence: he used an EBITDA multiple of 5x with little in support of this choice.
These comments were in stark contrast to the Judge’s comments on the other expert: he “presented as an entirely credible expert witness with a keen awareness of his oath and his duty to assist the court. His report was extremely thorough.”
The case pivoted on a single technical issue, that of personal goodwill. Ms Stanbury was a highly regarded fashion stylist acting for between five and ten extremely high net worth individuals. The relationships were intensely personal and Ms Stanbury was not able to delegate any substantial part of her role to others.
Various UK cases were cited relating firstly to the qualities of goodwill and secondly to goodwill that is personal in nature. The Judge concluded that he was satisfied that the goodwill of Ms Stanbury’s styling business was personal goodwill. There was no business without Ms Stanbury. The name Style Council had no intrinsic value.
The backdrop to the case was that the Judge had very little sympathy for the claimants. He described their approach as an extremely lazy and unhelpful way of conducting litigation. He concluded his written decision by stating: “It is most regrettable that [Ms Stanbury] and her family have been put through the stress of these proceedings.”
The Innocent Wanders into Court
In the case of Van Oord and Allseas UK Limited [2015] EWHC 3074 an ill-experienced expert thought that it was his duty to go into the witness box and to be the mouthpiece for his client. He found the process of being excoriatingly cross examined so painful that he disappeared from the court room during a break.
There is probably a similar force at work in the Coldunell dilapidations case above: the Judge made the point that it was the first occasion on which the expert had been called upon to give expert evidence in Court.
An expert witness who is to give evidence is well advised to be schooled in the requirements of that role and the nature of the duty to the Courts in the UK.
A Clash of Cultures
The US and UK legal systems, both springing from the same stem of English common law, have continued to sprout and develop, but with different variegated offshoots. As can be seen from the above, the UK courts have laid great store in the emphasis upon the conduct of experts, most notably that of being objective and not being partisan.
Business valuation experts with experience of the US legal system can readily find themselves in considerable difficulty in the UK courts. This was evident in the divorce case of Work v Gray [2016] EWHC 562 in which two business valuation experts from big 4 accounting firms in the USA demonstrated little awareness of the rules of procedure in the UK. Their unwillingness to cross certain red lines in their evidence was apparent to the court. Their evidence was not accepted.
A similar situation has arisen more recently, far removed from business valuation. The case of Commscope Technologies LLC and SOLiD Technologies Inc [2022] EWHC 769 involved two experts in antenna systems for mobile phones. The expert from the USA made the fatal error of not understanding the expectations of expert witnesses in UK courts.
The written decision stated: “[The expert] was a poor witness…..As SOLiD submitted, he had a number of ‘red lines’ which he would not cross, even when he was unable to articulate any coherent reason for the position he adopted, and he had difficulty with adopting the correct role of an expert witness before the English Court.”
The Judge also stated: “However, in my view, [the expert] was one of those expert witnesses who, having significant experience of the US system, had significant difficulty adjusting to the rules applying to the giving of expert evidence in this Court.”
The Judge referred to the other expert as being careful, knowledgeable and cooperative, giving his evidence in an impartial fashion. The written decision referred to him as being a model expert witness.
The moral of the tale is clear: there is no bar on US based experts giving evidence in UK courts. Before doing so, and before even putting pen to paper, they are well advised to obtain from Counsel clear guidance on their role. That should include an understanding of the importance of being, and being seen to be, objective and impartial.
Strong Criticism
Finally the Courts will not hold back if experts fail in their basic duties of delivering what the Courts require in accordance with agreed timescales. The 2019 case of X and Y (Delay: Professional Conduct of Expert} is a written decision of a Judge, placed on the public record, dealing solely with the failings of a medical expert. The expert in question had been required to examine X and Y, both of whom have complex physical disabilities and learning needs, and to prepare two reports. Despite being chased by the legal teams on several occasions, she failed to conduct the examinations, to review the detailed medical records and to produce her reports. It appears that the expert in question had some significant domestic pressures of her own; however instead of communicating her inability to carry out the work to schedule, she made a series of promises which she knew could not be fulfilled.
The Judge stated: “I am deeply concerned about the way Dr Ward has behaved in this case. It does not meet the standards expected of an expert witness or the expectations of the court in this particular case. It cannot be allowed to pass without comment. That comment should be placed in the public domain.”
This came towards the end of a distinguished career as a specialist in her field. The powers given to an expert in the UK judicial system are indeed matched with responsibilities.
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About the Author:
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Andrew Strickland is a Chartered Accountant and specialist in business valuation, serving as the subject matter expert in valuation for the Institute of Chartered Accountants in England and Wales (ICAEW). He has acted as expert witness in numerous court proceedings and regularly undertakes valuation assignments for shareholder disputes, divorce proceedings, and fiscal matters in both the UK and Ireland. Andrew is known for his expertise in complex share class modelling, including Black-Scholes applications and illiquidity discounts. He is a Director of the International Institute of Business Valuers and chairs its education committee, delivering training and contributing to the global development of valuation standards.
Depths• Autumn-Winter 2025 • Water
The Spotify Story: From Narrative to Numbers
By Graham Antrobus
Introduction
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Spotify’s journey from a scrappy music-streaming startup in Sweden to a global audio platform has captured investors’ imaginations. But how do we pin down what this influential company is really worth? Traditional valuation metrics often fall short for high-growth tech firms like Spotify; their current profits may be scant, but their future potential looms large. This is where “Narrative and Numbers ” come into play. As Professor Aswath Damodaran, a renowned valuation expert, famously puts it, “in a good valuation, the numbers are bound together by a coherent narrative and story telling is kept grounded with numbers”. In essence, every valuation begins with a story about the company’s future, and that story must make sense of the numbers we project.
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In this paper, we will first explore Damodaran’s narrative-and-numbers approach to valuation - understanding why telling a credible story is just as important as crunching the figures. Then we will turn to Spotify’s own narrative: a tale of rapid growth, global expansion, and strategic pivots. We will see how Spotify’s story (from its booming user base to the challenges of turning a profit in the music industry) sets the stage for the numbers in a valuation model. Finally, we will translate Spotify’s narrative into an intrinsic valuation, discussing what the company’s cash flows and margins need to look like to justify its market price. The punchline: the narrative behind the numbers can make or break a valuation. In Spotify’s case, the market is betting on an optimistic story – one that leaves little room for error if reality unfolds differently.
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Damodaran’s “Narrative and Numbers” Approach
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Valuation is far more than plugging numbers into a spreadsheet; it’s an exercise in story-telling paired with financial modelling. Professor Damodaran’s narrative-and-numbers framework emphasises that neither narratives nor numbers alone are sufficient. A story without numbers is just wishful thinking, and numbers without a story can lead to what he calls “spreadsheet nirvana” - unrealistic projections such as endless double-digit growth or ever-expanding margins unmoored from reality. By integrating the two, we ensure that our assumptions make sense in the real world and that our enthusiasm is tempered by cold, hard facts.
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In practice, this approach means starting with a qualitative vision of a company’s future and then translating it into quantitative assumptions. Is the company a niche player or a dominant platform? How big could its market become? What kind of profit margins seem plausible given the industry and competition? These qualitative judgments inform the numbers from revenue growth rates, to target profit margins, required investments, and risk factors (like the discount rate). Damodaran often illustrates this with examples from high-growth tech firms where narratives can far outpace current earnings. For instance, when valuing Uber during its IPO, he outlined multiple scenarios, from a “niche urban taxi app” to a “global logistics platform”, each with very different financial trajectories. In other words, Uber’s value could swing dramatically depending on which story you believe about its future. Similarly, in Tesla’s case, the valuation differs if your narrative is “a niche luxury EV maker” versus “a company revolutionising the entire auto and energy industry.” A revolutionary Tesla story justifies a far higher valuation than a niche-car-maker story. The lesson is clear: a coherent narrative makes your valuation assumptions transparent and grounds them in business reality, while the numbers discipline the story so it doesn’t become fantasy.
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This narrative-driven mindset is especially critical for companies like Spotify that are high-growth or disruptive in nature. Traditional valuation methods (which rely heavily on current earnings or steady-state assumptions) can severely undervalue such firms because much of their worth lies in future possibilities. The narrative and numbers approach forces us to confront uncertainties explicitly. We can ask “what if” questions such as What if a new competitor enters? and What if Spotify successfully pivots into new content formats? By tweaking the story and adjusting the numbers, we can see how sensitive the value is to different futures. In short, Damodaran’s framework provides a structured way to marry storytelling and finance, ensuring we neither get lost in dream-world narratives nor in Excel oblivion. With this approach in mind, we turn to Spotify which is a perfect case study for narrative-driven valuation. We lay out the story that will drive our numbers.
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Spotify’s Narrative: Growth, Disruption, and Challenges
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The Growth Story
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Spotify’s narrative begins with staggering user growth and a mission to dominate how the world consumes audio. Since its founding in 2006, Spotify has expanded to hundreds of millions of users across more than 180 markets. As of 2024, Spotify boasted 675 million Monthly Active Users (MAUs), up from just 271 million in 2019. Paying subscribers, the lifeblood of its business, reached 263 million by 2024 (Stassen, M (2025)), more than doubling from 124 million in 2019 (Ingham, T (2020)). This growth trajectory is a key part of the story: Spotify as the global leader in music streaming, continuously enlarging its base. However, there’s an important subplot: while Spotify’s user count keeps climbing, the growth rate is gradually moderating as certain markets become saturated. In its early years, Spotify saw annual user growth above 30%. By 2023, MAU growth had eased to approximately 23%, and premium subscriber growth to around 15%. In developed markets like North America and Western Europe, most music streamers already use a service, so Spotify’s new user additions are increasingly coming from elsewhere.
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Going Global and the Average Revenue Per User (ARPU) Conundrum
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The next chapter of Spotify’s story is about where future growth is coming from and what those users are worth. The company’s expansion has shifted toward emerging markets in Asia, Latin America, and Africa, where millions of new users are coming online. The opportunity is huge: think of India, Indonesia, Nigeria all of which incorporate vast populations just beginning to adopt streaming as internet access spreads and smartphones become ubiquitous. Spotify’s narrative envisions tapping into these markets to reach well over a billion users one day. The catch is that consumers in these regions won’t be paying $10 a month like a typical subscriber in the US or UK. In fact, many new users opt for discounted plans (family plans, student plans) or are in countries where Spotify’s pricing is set lower to reflect local income levels. As a result, as Spotify’s user base includes more listeners from emerging markets, the average revenue per user (ARPU) tends to decline. We have already seen the conversion rate of free users to paid subscribers dip as growth penetrates lower-income markets (premium subs were of the order of 46% of MAUs in 2019, but only around 39% of MAUs by 2024). And while Spotify was historically reluctant to raise prices, in mid-2023 it enacted a 10% global price increase on many plans, the first such broad hike, to bolster ARPU. By Q4 2024, these moves helped stabilise and even bump up Premium ARPU to around €4.85 per month (roughly $5+). That’s a positive turn after years of ARPU decline, but it’s still only about half of the headline $9.99 monthly price in major Western markets. The narrative takeaway is that Spotify can continue adding hundreds of millions of users in Asia, Africa, and Latin America, but many will pay less on average, so revenue growth won’t just be a simple multiplier of user growth. It’s a game of high volume, potentially at lower unit revenue.
Freemium and the Funnel
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A crucial element of Spotify’s story is its freemium model. The service has a free tier (supported by ads) that acts as a massive top-of-funnel to attract users, with the hope of converting a percentage of them to paid Premium subscriptions. This model has allowed Spotify to sign up over half a billion users, far more than if it were purely paywalled. However, free users monetise at a much lower rate, roughly one-tenth the ARPU of paying subscribers, by some estimates. Spotify’s strategy, therefore, is to keep expanding this funnel, knowing that if even, say, 1 in 3 free users eventually becomes paying (over a few years), the growth engine keeps humming. The narrative here emphasises Spotify’s market share and scale: it’s often the number 1 audio app in terms of time spent by users in many markets. High user engagement, people using Spotify for many hours, translates into greater potential value per user (they’re more likely to see the benefit of Premium, or generate more ad impressions). In storytelling terms, Spotify isn’t just a music app, it wants to be the default “audio platform” of the world – the place you go not just for music, but for podcasts, audiobooks, and more.
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The Cost of Content - Spotify’s Achilles Heel
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If the first part of Spotify’s narrative is about growth and scale, the second part is about the struggle for profitability in a tough industry. Despite its enormous revenues (over €15 billion in 2024), Spotify has posted operating losses for many years. The core reason: Spotify must pay hefty royalties for the music it streams. About 70% of each pound of revenue goes right out the door to record labels, music publishers, and other rights holders. That leaves only 30% of revenue to cover everything else from engineering and marketing to office rent. Spotify’s gross margin, historically in the mid-20s percent, is much thinner than most tech companies. This is a fundamentally different model from, say, Netflix, which spends a lot on content up front but then owns that content; Spotify doesn’t own most of its music catalogue and must rent it perpetually.
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The narrative implication is that Spotify’s fate hinges on improving margins despite this structural disadvantage. For years, sceptics argued that Spotify was doomed to remain a “middleman”, essentially a pass-through platform, that will always see labels capture the lion’s share of value, keeping Spotify’s own profits low. Indeed, even as revenue grew, Spotify’s operating expenses (R&D on the app, marketing to acquire users, etc.) consumed much of the slim gross profit margin. It wasn’t until 2024 that Spotify marked a turning point by delivering its first-ever full-year net profit. That year, the company managed a €1.4 billion operating profit (around 9% operating margin) after a small loss in 2023. How? Management undertook significant cost-cutting in 2023, including layoffs and trimming marketing and overhead. At the same time, the mid-2023 price increases and better monetisation of podcasts and ads lifted the top line. The result was that gross margin improved to about 30% (a record high for Spotify) and the company showed that it can be profitable, at least modestly. This was a pivotal moment in the narrative: it proved Spotify isn’t destined to bleed cash forever. However, one profitable year doesn’t guarantee a trend. The structural challenge remains – royalty costs aren’t going anywhere (in fact, the more Spotify’s revenue grows, the more it pays in absolute cash terms to content licensors). Some investors worry that as soon as Spotify shows solid profits, music labels will demand a larger slice, keeping Spotify’s margin in check. This dynamic, namely who gets the bigger piece of the pie, Spotify or the content owners? – is an ongoing tension in the narrative.
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Expanding the Story Beyond Music
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To counter the margin pressure of music streaming, Spotify’s narrative has evolved to include becoming an audio platform, not just a music jukebox. A big part of this is Spotify’s push into podcasts and other original content. Starting around 2019, Spotify spent aggressively to acquire podcast studios (such as Gimlet Media and Anchor) and struck exclusive deals with star creators (most famously, a reportedly $100+ million deal with Joe Rogan). In total, Spotify invested over $1 billion in building out its podcast and audiobook arm (Khomami, N (2022)). The strategic aim was two-fold: differentiate Spotify with exclusive content (to attract and retain users) and improve margins, since podcast content, once acquired or produced, doesn’t typically require paying out 70% of each user’s listening in royalties. Podcast advertising also became a growing revenue stream. Advertising in podcasts can command high rates and Spotify can insert them dynamically with better targeting. The story sounded great: Spotify could transform from a low-margin music streamer into a broader audio platform with higher-margin content (much as Netflix moved into originals to lessen its reliance on licensed movies). Reality, however, has been mixed. While Spotify quickly became one of the largest podcast platforms, the return on those investments has been questioned. By 2022–2023, there were signs of overspending on audio content that wasn’t yielding proportional gains in users or profits. Spotify ended up scaling back some of its podcasting expenditure and even cancelling certain exclusive shows. This illustrates an important point in the narrative: strategic pivots are costly and uncertain. The narrative remains that Spotify could leverage its platform to push into more lucrative content, but the degree of success is still unfolding.
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Meanwhile, competition looms in the background of Spotify’s story. Tech giants like Apple, Amazon, and Google (YouTube) are all vying for ears. Apple Music and Amazon Music are direct competitors (often bundled into devices or broader subscriptions like Amazon Prime), and they have deep pockets. Apple and Amazon might be willing to accept lower margins or use music streaming as a customer acquisition tool for their ecosystems, which can cap how much Spotify can increase prices. Additionally, big tech can bundle music with other services (Apple One bundle, etc.), posing a threat to Spotify’s stand-alone model. The narrative question for Spotify is: Can it continue to thrive as an independent, specialised platform, or will it be squeezed by tech giants’ integrated offerings? So far, Spotify’s leadership in user base and its laser-focus on audio have given it an edge, but it’s a space to watch.
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Summary of the Spotify Narrative
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Spotify is a classic high-growth platform story with a twist. On one hand, it has scale, brand, and a massive user base that loves the product which is undeniably a fantastic position for any consumer tech firm. On the other hand, it operates in an industry with inherently thin margins and powerful stakeholders (labels) that limit its profitability. The narrative boils down to a pivotal question posed by many analysts: Will Spotify eventually wield pricing power and unique content like a Netflix – enabling it to substantially boost margins – or will it remain more of a commoditised distribution middleman for music, with margins forever constrained? How you answer that question greatly influences how you value the company.
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From Narrative to Numbers: Valuing Spotify
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Given the story above, how do we translate it into an intrinsic valuation, essentially a model of Spotify’s future cash flows, to see what the business is worth? We use a Discounted Cash Flow (DCF) approach, which forecasts Spotify’s financials (revenues, profits, investments) and discounts them back to present value. This is where we tether the narrative to numbers. The key assumptions that emerge from Spotify’s narrative are as follows:-
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User Growth
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We project Spotify will continue growing its user base, albeit at a decelerating rate as it matures. The narrative of expansion into emerging markets suggests hundreds of millions of new users could join over the coming decade. However, many of these will be free users initially, and conversion to paid might be gradual. We might assume, for example, Spotify reaches of the order of 1 billion MAUs by 2030 in an optimistic scenario, with perhaps 40 to 45% of those as paying subscribers (maintaining a similar conversion rate as today, with some improvement if emerging market incomes rise). The exact numbers can vary, but the story implies substantial headroom for growth.
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Revenue Growth and ARPU
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With user growth comes revenue growth, but recall the ARPU conundrum. Our valuation model should reflect that adding users in lower-ARPU regions drags on average revenue per user. We might assume only modest ARPU increases in the long term. Perhaps Spotify can nudge prices up globally by a few percent every couple of years (as it did in 2023), but it can’t suddenly charge emerging market users the same as Western users. The narrative also includes new revenue streams (podcasts, audiobooks, ads). Those could boost Spotify’s overall revenue per user if executed well. A balanced assumption might be that Spotify’s overall revenue grows at a healthy rate in the next 5 to 10 years, maybe on the order of 15% annually for a few years, tapering to single-digit growth as the market saturates. This is consistent with strong growth but not fantasy; indeed from 2019 to 2024 Spotify’s revenue CAGR was around 20%, and it has recently been around 13-18% per year.
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Profit Margins
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Here lies the crux of Spotify’s valuation. In a DCF, small changes in long-term profit margins have huge effects on value because they determine how much of the revenue actually turns into free cash flow. Our narrative provides both optimistic and cautious inputs. On one hand, 2024’s breakthrough, a nearly 9% operating margin, shows improving profitability. With continued cost discipline, some pricing power, and growth of higher-margin segments (podcasts/ads), one could envisage Spotify pushing its operating margin into the teens over the next decade. Perhaps the best case narrative is that by 2030 Spotify achieves a 20%+ operating margin, approaching what Netflix has today. On the other hand, the constraints are real: labels might claw back a share, and competition may force Spotify to keep spending or keep prices low. A more conservative narrative might cap long-term margins in the 10-15% range i.e. profitable, but not nearly as high as some other tech businesses. For our base-case valuation, we might assume something like 15% operating margin in steady state (2030 and beyond), which would be a significant improvement from historical levels of 0% to 5%, but still below Netflix’s 20%+ margins.
The market’s current pricing seems to be baking in an expectation closer to that bull case: analysts note that at a ~$587 share price (early March 2025, giving a market cap of about $117 billion), investors appear to believe Spotify can ultimately hit around 20% operating margins as well as sustain solid growth. In other words, the stock market is already pricing Spotify as if it will execute exceptionally well on margin expansion.
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Reinvestment and Cash Flow
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To grow, Spotify must continue to invest in R&D, marketing, content deals, etc. Our DCF accounts for these investments, usually by considering capital expenditures and increases in working capital. Spotify’s story is not one of heavy factories or physical capital – it’s more about continual investment in content and technology. We note that Spotify scaled back some spending to achieve profitability, so perhaps the narrative going forward is more measured investment, focusing on efficiency. In a model, this might mean Spotify can grow without proportionally growing its costs as fast indicating a degree of operating leverage. Indeed, the 2024 results showed revenue grew by around 18% while many operating costs grew much slower or even shrank. This trend, if continued, bodes well for cash flow.
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Risk and Discount Rate
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Spotify is still a relatively risky proposition. It is in a competitive, evolving industry, and it has only just turned profitable. We would use a discount rate (cost of capital) that reflects that risk, perhaps gradually declining as the company matures. For instance, a higher discount rate in early years (to account for uncertainty) tapering to something more typical for a stable tech firm in the future. The narrative here includes improved investor sentiment after Spotify’s 2024 profit milestone. Some might argue risk perceptions have eased a bit, which could justify a somewhat lower discount rate.
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Putting all these pieces together, we forecast Spotify’s financials for, say, the next ten years and then determine a terminal value (valuing the business beyond the forecast horizon). When this was done in our analysis, the intrinsic valuation (DCF) for Spotify yielded an equity value in the range of about $450–$550 per share under those “reasonable” assumptions. That equated to roughly €90 to €100 billion in market cap, which, notably, is in the same ballpark as Spotify’s actual market value in early 2025. In other words, our story-driven DCF did not find Spotify grossly over- or undervalued; it is roughly valued where the fundamentals suggest it should be (within a broad range). However, crucially, that conclusion comes with a big asterisk. It assumes Spotify will indeed execute on the narrative we’ve laid out including strong growth and steadily rising margins to mid-teens or higher. The current market price arguably reflects a fairly optimistic scenario, perhaps even a bit of a “bull case”. One way to see this is to invert the process: if we plug Spotify’s market cap into a DCF model, what does it imply? It implies that the collective market believes Spotify will achieve something like high-teens annual revenue growth for several years and around a 20%+ operating margin by the 2030s. That’s an ambitious outlook. It is not impossible but it is certainly demanding.
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So, is Spotify a bargain or overpriced at current levels? It depends on whether you buy into the narrative that Spotify can become significantly more profitable. If Spotify can truly evolve into the “Netflix of audio”, with pricing power, a unique content ecosystem, and much higher margins, then its current €100 billion valuation could be justified or even modest. In that scenario, the company’s cash flows by the 2030s might support the valuation, and as investors we would eventually see the P/E multiples come down to earth as earnings caught up (just as Netflix’s did once it matured). However, there is very little room for error in this rosy narrative. Any sign that Spotify is stagnating or that its margins might plateau below expectations could lead to a sharp correction in the stock price. Remember, at present the stock is trading at very rich multiples of current earnings – over 100× 2024 earnings, for instance – which the market tolerates only because it is looking forward to much better future earnings. If those better earnings don’t materialise, the valuation has no basis.
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It is informative to consider some risk factors that could derail Spotify’s story (and thus its valuation):
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• Content Cost Pressure: Music labels might push for higher royalty payments now that Spotify is profitable, which could squeeze Spotify’s gross margins further. The power dynamic with labels is a constant balancing act; any worsening of terms for Spotify would directly hit the bottom line.
• Regulatory Changes: There are discussions, especially in the EU, about whether artists are paid fairly by streaming platforms. Regulatory intervention could force Spotify to pay more to content creators or alter its business practices, which could increase costs.
• Competition and Bundling: As mentioned, Apple, Amazon, and other tech giants might bundle music with other services, potentially slowing Spotify’s premium subscriber growth. Also, if a competitor finds a way to differentiate (say, exclusive content or a new social music experience), Spotify might lose its edge in engagement. That could weaken the “network effect” narrative of Spotify as the place for audio, and limit its ability to raise prices or maintain growth.
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If any of these risks materialise in a significant way, Spotify’s growth or margin trajectory could fall short, making the current market optimism look overblown. In such a case, we’d expect a downward re-rating of Spotify’s stock. Essentially, the market is “pricing in” a margin-rich future for Spotify – it is looking past today’s thin profits to tomorrow’s healthy profits. That forward-looking price can evaporate if the narrative cracks. Thus, monitoring Spotify’s key metrics (user growth, ARPU, and especially operating margins) is vital. Our DCF valuation explicitly shows that margin expansion is the linchpin of long-term value - the user base will likely be there, but converting revenue into profit is what really “moves the needle” on intrinsic value.
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Conclusion: The Power of Narrative in Valuation
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Spotify’s valuation story illustrates a broader lesson in finance: the narrative behind a business often drives the valuation more than the current numbers do. That doesn’t mean numbers are unimportant – on the contrary, they are the manifestation of the narrative. But it means that investors are fundamentally betting on a story of the future. In Spotify’s case, they’re betting on a story where the company keeps growing its global audience and morphs into a highly profitable platform that changes the economics of audio. If one subscribes to that story, one might be comfortable with the lofty price-tag on the stock. If one is more sceptical – perhaps thinking Spotify will remain stuck with slim margins - then even the impressive user growth numbers wouldn’t justify the current valuation.
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As Damodaran’s approach teaches us, a good valuation ties these two elements together. The Spotify analysis we walked through shows how we start with a narrative (e.g. “Spotify becomes the Netflix of music with 20% margins”) and derive numbers from it, then cross-check those numbers with the market’s pricing. We saw that different narratives yield different values. The market’s optimistic narrative makes the intrinsic value higher; a cautious narrative makes it lower. Neither narrative is “right” or “wrong” per se - it’s about which one is more plausible given the evidence, and that’s where judgment comes in.
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Valuation is often described an art informed by science. The science is the finance - the DCF equations, the multiples, the growth rates. The art is building a credible story of the business’s future. In the end, the story arguably carries more weight, because if the story is flawed, the model’s outputs are meaningless. Conversely, a compelling narrative with no numbers to back it up is just hype. Spotify’s current market value reflects a prevailing narrative that is quite optimistic, and thus far the company’s trajectory (huge user base, improving margins) supports it - but the true test will be in the coming years.
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In any valuation, including Spotify’s, narrative and numbers must dance together. Yet if we have to pick one, the narrative is the leader: it sets the direction, and the numbers follow. For Spotify, the narrative of conquering the audio world and attaining healthy profitability will determine whether its stock hits the right notes or falls flat. In valuation, as in music, it’s the story that makes the song memorable - the numbers merely provide the rhythm to support it.
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Sources: The analysis above is based on Spotify’s reported financials (through 2024) and an intrinsic valuation framework, prepared to a valuation date of 31st March 2025 and inspired by Prof. Damodaran’s narrative-and-numbers approach. Additional context on Spotify’s business model, growth, and strategic moves has been drawn from industry data and commentary, as well as valuation scenario assessments comparing Spotify’s intrinsic value to its market pricing. These illustrate how the company’s story and its numbers intertwine to paint a picture of its worth.
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Bibliography
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Weatherbed, J. (2024) ‘Music streaming platforms must pay artists more, says EU’. The Verge, 17 January. Available at: https://www.theverge.com/2024/1/17/24041343/eu-music-streaming-platform-artist-pay-europe-regulation.
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About the Author:
Graham Antrobus BSc (Hons), BFP, FCA, CTA, BVIUK, CBV, ASA, ABV, CVA, ICVS, is an Associate at Bruce Sutherland & Co, a specialist valuation advisory practice in Moreton-in-Marsh, Gloucestershire. He is a member of the Business Valuation Resource Panel of The Appraisal Foundation, President of the International Virtual Chapter of the American Society of Appraisers and a Visiting Industrial Fellow at Oxford Brookes Business School.
Disclaimer:- The views and analysis presented in this paper are my own and do not necessarily reflect those of any organisation or institution with which I am affiliated. This paper is intended for informational and educational purposes only and should not be construed as financial, investment, or legal advice.
While every effort has been made to ensure the accuracy of the information presented, no representation or warranty, express or implied, is made as to its completeness or reliability. Any opinions expressed are based on publicly available data, professional judgment, and reasonable assumptions as of the date of the underlying valuation analysis.
This paper does not constitute an offer, recommendation, or solicitation to buy or sell securities, nor should it be relied upon as a basis for making investment decisions. Valuations and forecasts discussed are subject to change due to market conditions, business developments, and other factors beyond my control.
Readers are encouraged to conduct their own research and seek professional advice before making any financial or investment decisions. Neither I nor any affiliated party shall be liable for any loss or damage arising from the use of this paper.