These growth stocks are outperforming the “Magnificent 7.” Should I Buy?

The “Magnificent Seven” stocks have dominated the market since early 2023. Leading the broader indices to new highs, these seven companies all had market capitalizations of at least $1 trillion at some point. The backbone of the modern stock market. Companies such as alphabet and apologize It has toppled most of its competitors, such as Yahoo. blackberry.

Investors may think it’s impossible to compete with the Magnificent Seven technology stocks at this point. But this is not the case in all fields. enter spotify (dot 0.96%). The leading music and audio streaming service has carved its own path globally despite major competition from the likes of Apple and YouTube. With the stock up 222% since the start of 2023, is now the perfect time to jump on the Spotify growth train?

Despite the disadvantages, it beat Apple and YouTube.

Spotify is well known as an audio streaming application. This allows users to play all the music from around the world, along with podcasts and audiobooks, with just an Internet connection. To make money, Spotify charges users a monthly subscription fee that gives them ad-free access to music, along with a few other features. This is where most of its $14.4 billion in annual revenue comes from today. Since going public in 2018, Spotify’s revenue has grown 209% in US dollars. Since 2015, premium subscribers have increased from 28 million to 236 million.

It did so despite fierce competition from Apple and YouTube (owned by tech giant Alphabet). Apple launched Apple Music in 2015, mimicking its Spotify service. Since then, the number of paid users has reached approximately 100 million, and Spotify has added 200 million paid users. YouTube Music currently has about 100 million paying users. Both competing services are large, but it’s notable that Spotify is still winning, considering that Apple’s and YouTube’s services are bundled with other products at a steep discount to Spotify’s.

These companies also own two distribution platforms for the Spotify service: IOS and Android mobile operating systems. Spotify has argued for years that both Apple and Alphabet acted anti-competitively by prioritizing their own applications over Spotify in their respective mobile app stores. Now governments are starting to agree.

Earlier this year, the European Union fined Apple $2 billion for certain anti-competitive practices against its music streaming service (meaning Spotify). Despite Apple and Alphabet both trying to destroy Spotify’s business, Spotify continues to grow. I think this shows how powerful the service is in the eyes of consumers.

2024 is the year when profits finally arrive

Spotify has always grown quickly, but never made a profit. Investors have been pummeling the business in 2022 as management once again defers profits into the future. Now, it seems that the year of turning a profit has finally arrived.

The company experienced major layoffs in 2020 and 2021 after hiring too many people, and has worked to eliminate redundant costs across its operations. In the fourth quarter of 2023, Spotify would have generated positive operating income, excluding one-time severance costs.

Even with fewer employees, the business continues to grow. We think this means that profits are likely to occur in 2024. Margins continue to rise and revenues are still growing at double-digit rates (16% year-over-year in the fourth quarter, for example). Management expects profit margins for the business to reach more than 10% over the long term, given unit economics. These aren’t the very high margins you see at other tech companies, but after 2024 it will be hard to argue that Spotify has an unviable business model.

SPOT Revenue (TTM) data from YCharts. TTM = Trailing 12 months.

Should I Buy Stocks?

After massive growth, Spotify now boasts a healthy market capitalization of $50 billion. Assuming a 10% profit margin can be reached within the next few years, $14.4 billion in sales would translate into $1.44 billion in profits. This gives the stock a (theoretical) price-to-earnings (P/E) ratio of 35, which gives it a significant premium compared to the market average.

With Spotify’s premium P/E multiple, investors should expect the company to grow quickly to meet its current valuation. Spotify is doing just that, with revenue growing at a double-digit rate in 2023. There is still a lot of room. The music streaming market is set to grow globally, and companies are making a massive push into podcasts and audiobooks to generate additional profits.

If Spotify can continue to grow revenue at a healthy pace, the stock still looks reasonably valued at this price. Don’t be afraid to buy a stock just because it’s up over 200% since early 2023.