Spotify Technology (SPOT 0.20%) delivered better-than-expected earnings results for the third quarter. Investors applauded the news by sending the shares up 9% as of 10:04 a.m. ET on Tuesday.
The Sweden-based streaming service reported lower operating expenses and higher revenue, which led to an operating profit of 32 million euros, reversing last year's operating loss of 228 million euros.
Spotify has benefited from new features on its platform that drove strong growth in monthly active users this year. The company is now making progress to convert growing users to a healthy profit, which is creating positive investor sentiment.
New artificial intelligence (AI) features are driving strong growth
The addition of 21 million monthly active users (MAUs) in the quarter was the company's second-largest third quarter in history. Spotify has enjoyed strong momentum in premium (paid) subscriber growth since it rolled out AI DJ earlier this year. It recently added to that offering with the introduction AI Voice Translation for selected podcasts. Premium subscribers grew 16% year over year to 226 million.
Spotify is demonstrating the advantages of scale and improving efficiency as it grows larger. Management attributed the operating profit to lower personnel and marketing costs. The ability to invest in new AI recommendation features that help reduce subscriber churn, all while lowering costs, points to a bright future for Spotify.
Why Spotify stock can climb higher
The quarter should support the stock's year-to-date gains in the near term, but it should continue to climb higher over the next few years. The quarter validates management's long-term goal to eventually convert 10% of annual revenue into an operating profit.
Moreover, the 26% year-over-year increase in MAUs puts the company on pace to exceed 600 million for the year. It also puts the company well on track to hit the long-term target of 1 billion. Spotify clearly has a lot of profitable growth that can send the stock higher from here.
