The benchmark S&P 500 stock market index is approaching an all-time high. Around 12 months ago, it was almost inconceivable we would be in this position today, given the index was wrapping up 2022 with an 18% loss.
But history is proof the S&P 500 always reaches new heights given enough time, which is why investing for the long term is so important. In fact, staying invested in the stock market for a period of 10 years gives you a 94% chance of making a profit.
With that in mind, let's consider music streaming company Spotify (SPOT 0.20%) and real estate technology company Zillow Group (Z 1.68%) (ZG 1.70%), which both represent fantastic long-term opportunities. Here's why investors sitting on idle cash -- money they don't need for immediate expenses -- should consider allocating $250 to buy one share in each company.
1. Spotify: 1 billion users by 2030, profitably
Spotify is the world's largest music and podcast streaming platform, with more than 574 million monthly active users. Only a handful of other companies operate in this space, and given that they offer practically the same music content, innovation is one of the only ways they can differentiate from one another.
Spotify's intuitive, user-friendly platform is arguably the most feature-rich in the industry. It leans on autonomous technologies like artificial intelligence (AI) to deliver fast and accurate content recommendations to boost engagement, and to design exciting new experiences. AI DJ, launched in early 2023, curates playlists tailored to each user's specific tastes, and while playing the songs, a software-generated voiceover provides commentary much like a real-life DJ would.
Such features help Spotify separate itself from the likes of Apple Music and Amazon Music.
Like many tech companies, Spotify has always operated with a growth-first strategy even at the cost of generating a profit. But with inflation and interest rates hurting consumers' wallets over the past two years, the streaming giant adjusted its posture to clear a path toward sustained profitability to shield its business from those economic headwinds.
In the recent third quarter of 2023, ended Sept. 30, Spotify cut its operating costs by 12.7% year over year, and managed to deliver a net profit of $65 million. That was a big swing from the $166 million net loss it generated in the year-ago period. Part of those cost savings resulted from 800 layoffs throughout 2023, as Spotify joined a long line of tech companies shrinking their workforces in the name of efficiency.
But in December, Spotify announced a further 1,500 job cuts, which represented a whopping 17% of its remaining staff. Layoffs are never pleasant, but they're a reality for companies in the transition phase from growth to profitability, and Spotify's bottom line will probably improve substantially in the coming quarters as a result.
Naturally, slashing investments in areas like research and development and sales and marketing could lead to slower growth. However, in Q3, Spotify told investors it plans to reach 1 billion monthly active users globally by 2030. The potential to hit that milestone while also generating consistent profits along the way could make Spotify stock a spectacular investment over the next decade.
2. Zillow is positioned for a long-term real estate boom
The real estate industry is very sensitive to interest rates. Between March 2022 and August 2023, the Federal Reserve raised the federal funds rate from a historic low of 0.25%, to 5.50% to tame high inflation. It was the fastest pace of interest-rate increases in the Federal Reserve's history, and it recently drove existing-home sales to a 13-year low of 3.79 million annualized units.
But the tide might be turning. Wall Street experts are anticipating six interest-rate cuts in 2024, which should reignite the housing market. The 30-year fixed mortgage rate already declined for nine straight weeks to 6.61%, from a peak of almost 8% earlier this year.
That's good news for real estate technology giant Zillow. The company provides a range of services to buyers and sellers, from digital listings to mortgages to closing services. Zillow also offers a suite of software and services to real estate agents to help them manage client relationships, set up inspections, and connect with potential buyers for their listings.
Zillow is in the midst of a transition. In 2021, its largest business unit was iBuying, which involved buying homes from willing sellers and attempting to flip them for a profit. It accounted for $6 billion of the company's total $8.1 billion in revenue for that year. But Zillow was forced to exit the segment following a wave of financial losses on its inventory of homes.
Now, the company is focused on building its portfolio of services. Estimates suggest there are more than $300 billion worth of fees charged to home buyers and sellers each year. Zillow wants to capture as much of that as possible; by 2025, the company's goal is to earn $5,200 from each customer transaction, from an addressable opportunity of $17,000.
If successful, Zillow's forecasts suggest it could generate $5 billion in revenue in 2025, which will be more than double its expected 2023 result of $1.9 billion. But it gets better. Services carry very high profit margins, so Zillow thinks it can deliver $2.25 billion in EBITDA (earnings before interest, tax, depreciation, and amortization) if its 2025 revenue guidance comes to fruition.
Achieving those results will depend on a sustained recovery in the housing market, and six interest-rate cuts in 2024 will certainly help in that regard. Longer term, Zillow's focus on high-margin services touching multiple segments of the transaction process will make its stock one of the best ways for investors to gain exposure to the real estate sector.
