Examining what stocks billionaires buy is a great investment move. These investors have massive resources (like teams of researchers) that can pinpoint great values and then scoop them up before the rest of the market learns about them.
However, the stock that billionaire Chase Coleman and his team at Tiger Global Management recently scooped up is very well known, as it has risen an astounding 645% since the start of 2023. The stock is Spotify (SPOT 2.92%), a service that many people have likely heard of or used. In the fourth quarter, Coleman and Tiger Global massively increased their holdings from just 2,560 shares to 1.26 million shares, valued at around $560 million.
Does Coleman know something that other investors don’t? Or does this big-time winner have more room to run?
Spotify has a ton of potential growth already on its platform
Spotify’s audio streaming service is the top option in the space. Its vast library of music and podcasts has taken over the streaming market, with Spotify totaling 675 million monthly active users. This figure rose 12% year over year, so there is plenty of growth still going on, at least from the total user side.
However, of those 675 million, only 263 million pay the premium subscription, so there is also a lot of room to convert some of the ad users to premium users. This is a very lucrative market for Spotify, as only 39% of the subscribers are premium users, but this cohort generates 87% of Spotify’s revenue.
That’s a huge chunk of potential revenue if Spotify can continue converting its ad-supported subscribers to premium subscribers. However, investors need to be realistic here, as there will never be a time when 100% of Spotify users switch to the premium model unless management decides to axe the ad-supported tier.
Coleman and his team at Tiger Global Management recognize this and see a path of continuing revenue growth. Wall Street analysts are also bullish on Spotify’s growth, as they expect 16% revenue growth in 2025 and 15% in 2026. That’s market-beating growth, so this stock looks like a potential winner, at least on the revenue side.
But how are its profits?
Spotify’s profits have never been better
2024 was a transitional year for Spotify, as it became solidly profitable.
SPOT Operating Margin (Quarterly) data by YCharts.
Spotify’s operating margin has stabilized around that 11% mark, which is very strong considering that Spotify’s gross margins hover around the 30% range. Compared to many software companies, Spotify’s margins aren’t nearly as high because it has to pay a significant amount of its revenue for the rights to stream music and podcasts. This is important to remember, as Spotify will likely never post massive 30% profit margins. Still, many fantastic investments haven’t had huge profit margins, so this doesn’t mean Spotify can’t be a successful investment.
Spotify’s first fully profitable year will be 2025, as it’s projected to be profitable for every quarter (some of the early 2024 quarters saw weak margins). Therefore, estimating its earnings per share (EPS) growth won’t give a realistic figure (as there will be some weak year-over-year comparisons). However, observers can look at Spotify’s forward price-to-earnings (P/E) ratio to get an idea of how expensive this stock is priced.
SPOT PE Ratio (Forward) data by YCharts.
At around 53 times forward earnings, Spotify’s stock looks very pricey, especially considering its expected growth of 16% this year. Investors must keep this in mind, as there are other companies that trade for far cheaper and are growing even faster than Spotify.
However, one thing factoring into this valuation is the large growth opportunity in premium subscribers and the stickiness of the Spotify platform. Most users don’t switch between platforms, as transferring their library from one service to another requires a lot of work.
Overall, I think Spotify has a lot of potential, but it’s probably too expensive at its current price tag. However, Chase Coleman and his team at Tiger Global Management clearly think otherwise, so I won’t blame investors for taking a position in Spotify now, as it does have a compelling investment case.
Keithen Drury has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Spotify Technology. The Motley Fool has a disclosure policy.
