I’d follow Peter Lynch’s advice and buy this bargain growth stock

Peter Lynch has managed to establish himself as a superstar investor. Therefore, I’m following his advice and buying this growth stock.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Arrow symbol glowing amid black arrow symbols on black background.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Although not as famous as Warren Buffett, Peter Lynch has established himself as one of the most successful investors in the world. From 1977 to 1990, his fund made a compounded annual return of 29.2%, making it the world’s best-performing fund during this time. Lynch has also provided a lot of investment advice, including recommendations to “buy what you know” and “invest for the long term”.  But one of my personal favourites is his insider trading quote. This stated that “insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise”. I would use this advice to buy Spotify (NYSE: SPOT), which has seen significant amounts of insider buying recently. This is despite the downturn in growth stocks over the past few months. 

Who has been buying? 

At the start of the May, it was announced that Daniel Ek was pouring $50m into Spotify shares. There are two reasons why this is a big deal. Firstly, investing $50m is a big sign of confidence into a company and cannot be considered merely tokenistic. Secondly, Daniel Ek is the co-founder of Spotify and the CEO. This means that he has significant amounts of inside knowledge around the company. In a period where growth stocks are getting considerably beaten down, this shows that he genuinely expects the Spotify share price to rise. It is also a fundamental reason why I am tempted to buy some shares in the company. 

Other factors 

Despite this insider buying, the Spotify share price has continued to slip. In fact, it is currently priced at $99. This is lower than when Ek recently bought shares and a 60% decline from last year. Such a fall has mainly been caused by the general sell-off of growth stocks, alongside worries about the firm’s profitability. 

For example, in Q1, despite revenues reaching €2.6bn, gross profit only totalled €671m. This means that gross margins only equal 25%. Other streaming services, such as Netflix, operate with gross margins of over 40%. This highlights that Spotify has extremely low margins for the streaming industry. As these large expenditures are not likely to decrease, this raises concerns about the ability for Spotify to ramp up its profitability. 

Why would I still buy this growth stock? 

Despite these concerns, I am still confident about the future of Spotify. In the recent investor day, Ek reiterated plans for the company to “get a billion users”, while also generating $100bn in annual revenue and 40% gross margins. These targets are very ambitious. Yet if they can be achieved, it is likely that the Spotify share price would soar in the long term. 

Further, the group currently trades at a price-to-sales ratio of under 2. Yet in Q1, revenues grew at a rate of 24% year-on-year. This indicates that the Spotify share price may have now dipped too low. Therefore, although I worry about the current poor gross margins, I still believe this growth stock has been overly beaten down. Daniel Ek’s recent purchase equally provides me with optimism. Therefore, I am tempted to add some Spotify shares to my portfolio.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Stuart Blair has no position in any of the shares mentioned. The Motley Fool UK has recommended Spotify Technology. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Warren Buffett owns this FTSE 100 stock. But should I?

Warren Buffett rarely invests in FTSE 100 shares but he does have a position in Diageo. Is it time for…

Read more »

Pink 3D image of the numbers '2025' growing in size
Investing Articles

After returning 101% in 2024 is this FTSE bank the best share to buy for 2025?

FTSE 100 bank NatWest Group turned out to be the best share to buy at the start of this year.…

Read more »

Investing Articles

Could Helium One be a millionaire-maker penny stock?

Shares of Helium One Global (LON:HE1) have soared 272% so far this year. Should I buy this penny stock while…

Read more »

Investing Articles

Are these 2 unsung FTSE blue-chips the passive income stocks I never knew I wanted?

Harvey Jones says that the FTSE 100 contains fantastic passive income stocks with deceptively modest yields. Here are two he's…

Read more »

A mixed ethnicity couple shopping for food in a supermarket
Investing Articles

Shhhh… These FTSE 250 stocks have quietly more than doubled in 2024

Forget those US tech titans. Our writer takes a closer look at two supposedly 'boring' FTSE 250 stocks that have…

Read more »

Investing Articles

As the Diageo share price flies on a double upgrade is this my last chance to buy it on the cheap?

The Diageo share price has inflicted plenty of pain on Harvey Jones in 2024, but suddenly it's serving up a…

Read more »

Investing Articles

7%+ yields! 3 choices to consider for a Stocks and Shares ISA

Christopher Ruane highlights a trio of FTSE companies each yielding over 7% he thinks investors should consider for a Stocks…

Read more »

Passive income text with pin graph chart on business table
Dividend Shares

How investors might try to turn £10,000 into a chunky passive income

Our writer Ken Hall looks at how the magic of compounding returns might help investors to create a handy second…

Read more »