If you're looking for a top-tier growth stock, you might want to consider Spotify Technology (SPOT 1.54%). The stock is up 86% over the past year, which may give some investors pause to start buying at the high, but Spotify has an excellent business strategy centered around artificial intelligence (AI) that can drive more growth over the long term.
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Spotify is turning AI into a cash ATM
Spotify has built a profitable growth flywheel centered around its investments in AI. User engagement with Spotify's AI-powered music DJ has nearly doubled over the last year. Spotify also released a new feature that allows users to tell the app what they want to listen to, and AI creates the playlist.
What this personalization does is lead to users spending more time in the app, which ultimately leads to growth in revenue, operating profit, and free cash flow. Spotify's total revenue grew 15% year over year in the second quarter, while profits are booming. Operating income jumped 53%, while free cash flow grew 43% over the year-ago quarter.
Spotify is experiencing excellent cost leverage as it rolls out new features that create more personalization. The company can collect data on how users are engaging with these features and continuously make improvements to the experience that drive increasing engagement, revenues, and free cash flow over time.
It has a total of 696 million monthly active users, with 276 million paying a subscription fee for the premium plan. Its total monthly active users grew 11% year over year last quarter. It is not done growing its user base. It could hit 1 billion or more down the road, which is management's goal, but it's important to note that Spotify also continues to grow average revenue per user.
Spotify has built a highly efficient growth flywheel using AI that will continue to fuel higher profits and returns for shareholders over the long term.
