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Even though monthly active users (MAUs) came up a tad lighter than expected in Q2, investors are singing Spotify's (SPOT +11%) praise today, pushing shares to three-year highs. Many other highlights outshined the MAU miss, including a third consecutive quarter of profitability, healthy top-line growth, and solid subscriber net adds. Also, while MAUs missed the mark in Q2, they still expanded sequentially, edging 1.8% higher to 626 mln.

SPOT has been on a tear lately, surging by over +70% YTD when incorporating today's move. Investors have consistently applauded the audio streaming platform for its swift transition to profitability, despite accompanying price hikes, which have not materially harmed MAU or premium subscriber growth. Impressively, even as SPOT implements further price hikes across several key markets, there has been less churn compared to the first round of hikes last year, which it noted was already low. This is no small feat and highlights SPOT's competitive edge in the ocean of endless music, podcast, and audiobook streaming services.

• SPOT's "year of monetization" continues to go swimmingly. The company reported positive EPS of €1.33 on revs of €3.81 bln, a 19.8% jump yr/yr. Subscriber net adds topped SPOT's guidance by 1 mln, reaching 7 mln in the quarter. Meanwhile, total premium subs grew by 12% yr/yr to 246 mln, ahead of its 245 mln forecast and supported by growth across all regions.
• So why did MAUs fall short? The miss can be attributed to how SPOT handles different markets. Developed markets, where users are more financially capable of absorbing a monthly fee, anchor its paid subscription business. Conversely, its ad-supported business is focused on developing markets, where SPOT targets converting users into paid subs but on a much longer time horizon.
• Each quarter, this dichotomy generates a few wrinkles. Engagement is different between developed and developing markets. In developing regions, conversion to paid is often slower than it is in developed countries, making it challenging to achieve the same level of ROI effectiveness from SPOT's marketing initiatives.
• However, SPOT is implementing two initiatives to tackle the problem of converting free users to paid users. For one, the company is stepping up its efforts to improve the impact of its marketing. Management is confident there are several levers it can pull over the coming quarters to make this strategy effective. Secondly, SPOT is prioritizing enhancements in its free product pipeline, which it believes will boost engagement.

Despite the disappointing MAU miss, SPOT's history suggests that the conversion rate of free users is more about when than if. Its actions to speed up this development may not produce conversions as rapidly as the company may expect. Investors, however, are willing to overlook the risks associated with any potential snags in SPOT's game plan, especially when it continues to generate profitable quarters.