We recently compiled a list titled Jim Cramer’s Top Stock Picks: 10 Stocks with High Potential. In this article, we will have a look at where Spotify Technology S.A. (NYSE:SPOT) ranks among the 10 stocks with high potential.
In a recent episode of Mad Money, Jim Cramer explains the current split between tech stocks and other sectors, noting that they often move in opposite directions. For instance, on a day when the Dow Jones Industrial Average gained 228 points and the S&P 500 rose by 0.13%, the NASDAQ—which is heavily weighted with tech stocks—fell by 0.52%.
“How did we get to this bizarre dichotomy between tech stocks and pretty much everything else, where the two groups now almost always seem to move in opposite directions? Take today: the Dow Jones Industrial Average gained 228 points, the S&P advanced 0.13%, but the NASDAQ—with all that tech in it—dropped a bomb. Yes, it fell 0.52%. How could there be such a schism?”
As a result, large institutions must shift investments between sectors since they can’t invest in both simultaneously. This situation is driven by market mechanics rather than fundamental news. When stocks are already performing well, attracting new investment is challenging, especially when safer investments offer decent returns. Consequently, either tech stocks or other sectors will perform well, but not both at the same time.
“It’s because there’s not enough money coming in from the sidelines, so these big institutions have to swap out of one group if they want to buy stock in another. Yet this action has nothing to do with fundamentals; it’s not about the news, it’s about pure market mechanics. When stocks are already red hot, it’s hard to attract new capital from the sidelines, especially when you can get a cozy 4% return for doing nothing. So, either tech wins or everything else wins, but there’s not enough cash for both of them to win at the same time.”
Market Shuffle: Winners vs. Losers and the Fed’s Big Decision
Cramer points out that this scenario leads to clear winners and losers instead of a spectrum of performance on a positive day. This is happening alongside uncertainty about whether the Federal Reserve will cut interest rates by 25 or 50 basis points in their upcoming meeting.
“What happens? We get winners and losers—not big winners and smaller winners, as you would normally expect on an up day like today. This is all against the backdrop of the big question: will the Fed cut rates by 25 basis points or 50 when it meets on Wednesday?
Now, you know me, I try to refrain from this parlor game of guessing the Fed’s next move based on the strength of the economy. Last week, when *The Wall Street Journal* indicated the Fed may actually be leaning toward 50 basis points, we saw this great migration into cyclicals, especially anything related to housing. Of course, last week, there was just enough good news to propel the entire market, which is why it was the best week of the year.”
Cramer also mentions that despite his tendency to avoid speculating on the Fed’s actions, recent market movements have been influenced by expectations about rate cuts. For instance, when The Wall Street Journal suggested that the Fed might opt for a 50 basis point cut, there was a significant shift toward cyclical stocks, especially those linked to housing. This shift, combined with other positive news, led to the best week of the year for the market.
“This leads me to this newfound great divide between tech and non-tech, because that’s how this market seems to be trading. It’s a big reason why I’m out here in Silicon Valley this week. Today, we saw a market that doesn’t believe in AI, AI, or tech in general, for that matter. It’s a market that believes a 50-basis-point rate cut will shift money from semiconductors to housing and anything housing-related, and people want to get ahead of that.”
“Anything But Tech”
Jim Cramer observed that Monday’s market saw a broadening of winners. Healthcare stocks, retailers, and consumer packaged goods companies all performed well. Even oil stocks, which have been struggling, are making a comeback. This is unusual because typically when cyclical stocks rally, sectors like healthcare and consumer products would decline. However, Cramer attributes this trend to a broader market shift he refers to as “ABT,” which stands for “anything but tech.” In other words, today’s market focus is on sectors outside of technology.
“Today, the winners broadened out. The healthcare stocks got jiggy, retailers worked, and consumer packaged goods companies outperformed. Even the much-maligned oils are rallying. It’s crazy—healthcare and consumer products should be selling off when cyclicals rally, but that’s not what’s happening because it’s *ABT*. No, I’m not talking about the symbol for Abbott Labs. ABT means “anything but tech,” and that’s what today’s market was about.”
Our Methodology
This article provides a summary of Jim Cramer’s latest Morning Thoughts, where he reviewed several stocks. We’ve chosen the ten most noteworthy companies he mentioned and ranked them according to how much they are owned by hedge funds, starting with the least owned and moving to the most owned.
At Insider Monkey we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A person wearing headphones listening to an audio streaming service.
Spotify Technology S.A. (NYSE:SPOT)
Number of Hedge Fund Investors: 88
Jim Cramer noted that KeyBanc has increased its price target for Spotify Technology S.A. (NYSE:SPOT) from $420 to $440 per share and maintained a buy-equivalent overweight rating. Despite the stock already rising about 80% this year, KeyBanc believes that Spotify Technology S.A. (NYSE:SPOT)’s potential earnings are still underestimated.
“KeyBanc upped its price target on Spotify to $440 a share from $420 and kept its buy-equivalent overweight rating on the stock, which is up about 80% year to date. This is an anointed stock in the “can-do-no-wrong” pantheon. KeyBanc argued the music streaming giant’s earnings power is underrated.”
Spotify Technology S.A. (NYSE:SPOT) is showing strong potential for growth, thanks to its impressive financial performance, rising subscriber numbers, and smart business moves. In Q2 2024, Spotify Technology S.A. (NYSE:SPOT)’s revenue jumped 20% from the previous year to €3.8 billion, while its gross margin improved to 29.2%. Spotify Technology S.A. (NYSE:SPOT) also posted an operating income of €266 million, a significant shift from earlier losses.
During the same period, Spotify Technology S.A. (NYSE:SPOT) gained 7 million new premium subscribers, bringing the total to 246 million. Its overall monthly active users (MAUs) grew 14% to 626 million, though this slightly missed expectations. However, the significant increase in premium subscribers has been the key driver of profitability. Spotify Technology S.A. (NYSE:SPOT)’s efforts to adjust prices and improve how it makes money from users have raised revenue per user. Spotify Technology S.A. (NYSE:SPOT) expects its gross margins to surpass 30% by 2025.
Analysts are optimistic as well, with Macquarie raising Spotify Technology S.A. (NYSE:SPOT)’s price target to $395, showing confidence in the company’s growth prospects. Spotify Technology S.A. (NYSE:SPOT) has more than doubled in value this year, reflecting strong investor confidence. With solid financial results, continuous subscriber growth, and a positive market outlook, Spotify Technology S.A. (NYSE:SPOT) is well-positioned for continued success.
Baron Focused Growth Fund stated the following regarding Spotify Technology S.A. (NYSE:SPOT) in its Q2 2024 investor letter:
“Spotify Technology S.A. (NYSE:SPOT) is a leading global digital music service, offering on-demand audio streaming through paid premium subscriptions and an ad-supported model. Shares of Spotify were up, largely attributable to impressive beats in gross margin and operating margin as well as the announcement of subscription price hikes.
Given the strong value proposition of the product, Spotify is beginning to exercise its pricing power following last year’s initial price increases that saw minimal churn. Users continue to grow at a healthy pace despite the pricing impact. Spotify also continues to innovate on the product side, with early trials of generative AI features and the addition of new verticals like audiobooks, which have seen solid early adoption.
On the cost side, Spotify is on a path to structurally increase gross margins, aided by its high-margin artist promotions marketplace, increasing contribution by its podcast division, and growth of the margin-accretive advertising business. We still view Spotify as a long[1]term winner in music streaming with the potential to reach more than one billion monthly active users.”
Overall SPOT ranks 6th on our list of Jim Cramer’s stock picks with high potential. While we acknowledge the potential of SPOT as an investment, our conviction lies in the belief that under the radar AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than SPOT but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published on Insider Monkey.
