So even if I maxed this out, my yearly passive income stream would be £1,200 from a 6%-yielding portfolio. While that would come in handy for Christmas presents, it’s hardly what I’d call huge.

Therefore, I’d take the long view when it comes to passive income. I’d give up bits and bobs from dividends and aim to build up my portfolio over time.

If I had nine grand to invest in an ISA today, I’d consider the following FTSE 100 trust as a starter stock.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

Hunting for outliers

Scottish Mortgage Investment Trust (LSE: SMT) aims to invest in the world’s greatest growth companies on behalf of shareholders. Its investing strategy is very long-term and differentiated.

For example, it has owned shares of Swedish industrial group Atlas Copco since 1995. And it has held Amazon, ASML and Tesla for over a decade.

These have all been fantastic stocks to own across a long period of time.

Scottish Mortgage’s mission to find the big winners of tomorrow has taken it deep into private markets too.

The trust now has around 26% of its portfolio allocated to unlisted assets, including SpaceX, which recently put the largest and most powerful spacecraft ever into orbit.

This does add an element of uncertainty, however, because these private companies are harder to put an accurate value on. Once they go public, they could get seriously marked down.

Of course, they could also increase in value, which is why the trust is invested in them.

The ‘YouTube of audio’

One portfolio holding I find very interesting is Spotify (NYSE: SPOT). Scottish Mortgage first invested in the music streaming platform back in 2015 when it was still a private company.

The trust says Spotify is reshaping the music industry, giving “artists access to unparalleled data analytics…[It] can do what the labels did for artists, but with more data, at a lower cost and without making any demand on copyright ownership.”

Of course, we know the company faces formidable competition in the shape of Apple and Amazon. These tech juggernauts are competing for the same music streaming subscriptions.

Yet Spotify now has 602m monthly active users and 236m paying premium subscribers. It has bundled audiobooks into the premium package, which I’m personally getting great value from as a subscriber. And it may bundle in more stuff (including podcasts) over time to keep listeners loyal.

It’s quickly becoming the YouTube of audio, and the market has started paying attention. I have too and the stock is on my watchlist.

Passive income plan

By investing my cash in a collection of UK stocks like Scottish Mortgage, I think it’s entirely realistic to aim for an average 9% annual return.

Naturally, this isn’t guaranteed. It could be less (or more) over time.

But if I was able to achieve this rate of return, £9,000 invested every year — the equivalent of £750 every month — would become £510,880 after 20 years.

At this point, I could restructure my portfolio around dividend stocks collectively yielding 6%, which would pay me a £30,652 yearly second income.

The post £9,000 in savings? Here’s a FTSE 100 stock I’d buy to target a £30,652 annual second income! appeared first on The Motley Fool UK.

Clearly, the stock is hitting all the right notes with investors. So I’m back for another look.

Why I didn’t invest

As a global leader in podcasts and music streaming, Spotify already has a lot going for it. But I like that it still has attractive adjacent market opportunities in films, events, audiobooks, e-commerce, as well as its targeted-advertising business.

Crucially, it has smart leadership in forward-thinking co-founder and CEO Daniel Ek.

So why have I never owned its shares?

In a word, competition. Specifically, the tech juggernauts that have stuck ‘music’ after their name and offer the same service: Apple Music, Amazon Music, YouTube Music, TikTok Music. This worried me.

But the strange thing is, I don’t use any of those apps. I’m a Spotify Premium member, along with 236m other subscribers worldwide at the end of 2023. So I already know how sticky the platform is.

My original fear was that all this competition would prevent the company from having pricing power to expand profit margins over time.

In other words, I was worried that it would raise prices by a few quid and droves of listeners would jump ship to cheaper rivals. And of course, Spotify has a lot more to lose as a pureplay streaming firm.

Growing globally

As it turns out, I needn’t have worried. The company is looking to increase prices in several key markets for the second time in 12 months, and this hasn’t affected growth.

Last year, revenue grew 13% year on year to €13.2bn. And monthly active users (MAUs) reached 602m, up 23% from the end of 2022. The number of paying premium subscribers rose 13% to 236m.

It did post a €532m net loss though, and has lost money every year since going public in 2018. But now that the platform is reaching enormous scale, management is laser-focused on generating profits.

It has cut costs, raised prices and this year analysts see €1.4bn of free cash flow from €15.5bn in revenue. Next year, there’s a forecast €1.1bn net profit.

The fly in the ointment, however, is valuation. The stock is trading on price-to-free-cash-flow ratio of 40 for this year and 32 for 2025. This is a premium price, which adds an element of risk.

Innovation

Having said that, I think the firm has built a durable competitive advantage. Whereas music streaming is arguably an afterthought for Amazon and Apple, Spotify is ‘all-in’ on audio.

This means it continuously invests in innovative technologies to improve the user experience. For example, it uses algorithms to regularly curate personalised playlists based on user listening habits.

More recently, it has introduced AI-powered DJs and a ‘Merch Hub’, which recommends music-related merchandise.

With over 600m regular listeners on the platform, the long-term advertising opportunities appear significant. And Spotify could further increase its premium prices (and therefore profits) by bundling podcasts in with audiobooks and music.

As a result, I’ve promoted the stock to my watchlist to keep an eye on. I’d invest on any significant dip.

The post Should I buy Spotify shares for my ISA portfolio? appeared first on The Motley Fool UK.

But with the recent earnings report disappointing investors, are Spotify shares now at a good price for my portfolio?

Why would I be interested?

There are a few reasons why investors may consider investing in Spotify shares:

• Strong track record: The company has a strong track record of growth. In the last five years, Spotify’s revenue has grown at an average annual rate of 19%. This growth is being driven by the increasing popularity of streaming music, as well as Spotify’s expansion into new markets.
• Market dominance: Spotify has a dominant market share in the streaming music market. The company has over 400m active users, and it accounts for over 30% of the global streaming music market. This gives Spotify a significant advantage over its competitors, such as Apple and Amazon.
• Well positioned: Spotify is well-positioned to benefit from the growth of the global streaming music market, expected to reach $100bn by 2025.
• Turning profitable: Spotify is currently not profitable, but this is expected to change in the next three years. This presents a potential opportunity to investors.

What might put me off Spotify shares?

• Profitless: As noted, the company is still not profitable. In the most recent earnings report, Spotify posted a net loss of $0.9bn. This is due to the company’s high marketing and content costs.
• Competition: Spotify faces increasing competition from other streaming music providers. Apple Music and Amazon Music are both investing heavily in their streaming music businesses, and they are both gaining market share.

How are the numbers?

Before investing in Spotify shares, I want to have a good understanding of these metrics:

• Price-to-sales (P/S) ratio: The (P/S) is a measure of how much investors are willing to pay for revenue a company generates. Spotify’s P/S ratio is two, notably above the sector average of 1.3, indicating that investors would have to pay a premium for Spotify shares.
• Earnings per share (EPS): EPS is a measure of how much profit a company generates per share. Due to being unprofitable, Spotify’s EPS has been negative in recent years. However, this is expected to turn positive in late 2023. The rate of EPS growth is 83%, suggesting that there could be some major growth ahead if the company can execute its strategy.
• Discounted cash flow (DCF): The DCF is a measure of future earnings. The current share price of $140.38 is currently 4% below fair value of $146.70. This suggests there may be some growth potential, but not a significant opportunity.

Am I buying?

Spotify shares present an exciting opportunity for investors who are looking for exposure to the growth of the streaming music market. However, with interest rates as high as they are, and with more resilient companies competing for market share, I will not be investing in unprofitable companies such as Spotify.

The post Down heavily after reporting earnings, are Spotify shares now a buy? appeared first on The Motley Fool UK.

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.

The post I’d follow Peter Lynch’s advice and buy this bargain growth stock appeared first on The Motley Fool UK.

Tech stock #1: Meta/Facebook

The first of my tech stocks to get wrecked is Meta (NASDAQ:FB), the parent company of social-media giant Facebook. Meta also owns popular services Instagram, WhatsApp and Messenger. After the US market closed Wednesday night with Meta stock at $323, the company released its latest quarterly results. Oh boy, did Mr Market not like Meta’s message. At Thursday’s low, the stock had plunged to $235.74. This fall of $87.26 a share wiped more than a quarter (-27%) from Meta’s stock price, reducing its market value from $900bn to $659bn. This $241bn collapse might well be the worst one-day loss of company value in US history. On Thursday, Meta stock closed at $237.76, down 26.4%. But what caused the collapse? First, a quarterly fall in daily active Facebook users. Second, warnings of increased competition from fast-growing rivals such as video-based social network TikTok. Ouch.

Tech flop #2: Spotify

On Wednesday, audio-streaming service Spotify (NYSE: SPOT) also released disappointing quarterly numbers. Launched in 2008, Spotify has 406m users — including 180m Spotify Premium paid subscribers — across 184 markets. The world’s most popular streaming subscription service offers access to over 82 million tracks, including more than 3.6 million podcast titles. Alas, like Meta, Spotify warned that its subscriber growth would slow in the first quarter of 2022. Despite total revenue growing 24% year on year to almost $2.7bn in Q4/21, this tech stock also got smashed. Spotify shares closed at $191.92 on Wednesday and hit a 52-week low of $155.57 on Thursday. That’s a fall of almost a fifth (-18.9%), losing over $8bn of market value. On Thursday, SPOT closed at $159.76, down 16.8%. Again, this is another example of highly rated, high-profile tech stocks getting beaten down when growth slows or fails to match future expectations.

Tech wreck #3: Paypal

The third of my trashed tech stocks is Paypal (NASDAQ: PYPL), which also missed financial expectations on Tuesday. Again, after warning of weaker growth, Paypal’s stock took a pummelling. Three months ago, PayPal forecast 18% revenue growth in the 2022 financial year. That forecast has since been reduced to 15% to 17%. It now expects earnings per share of $2.97 to $3.15 in 2022, versus $3.52 in 2021. With the payments service apparently going ex-growth, its shares plunged on Wednesday. After closing at $175.80 on Tuesday, Paypal stock hit a low of $129.01 on Wednesday, before recovering to close at $132.57. That’s a crash of almost a quarter (-24.6%), wiping over $50bn from the group’s value. On Thursday, the stock opened lower still, bottoming out at $123.85 before closing at $124.30, down another 6.2%. Paypal also closed 4.5m accounts for abusing opening incentive payments, reducing its customer base to 426m.

Of course, each of these price slides could well be a blip after heroic performances from tech stocks since 2019. And all three companies have outstanding global brands. Who can say? Personally, I have already reduced my family portfolio’s exposure to highly rated US tech stocks. Instead, we’re buying cheap UK stocks on lowly ratings that pay high cash dividends!

The post This is what happens when tech stocks get wrecked! appeared first on The Motley Fool UK.