Spotify ($SPOT) popped over 15% over the last two days on enthusiasm about its new features.
- In the app, Spotify introduced in-app quizzes, premium badges, new personalized playlists, social media stories format, and more.
- For podcastsSpotify announced better audience and episode analytics for podcasters, expanded top podcast charts for better discovery, and new tools for reaching more listeners.
- If you would have bought $SPOT then, you would be up 74%
- If you would have bought $NFLX then, you would be up 19%
As always, this is a game of batting averages, and we must be right like $SPOT more than we are wrong.
- So far, we’ve had many more winners than losers this year on the Big Board, leading to great outperformance. But let’s not celebrate too much, as this is a long-term game and the goal is to keep this up for 10+ years.
It might sound obvious, but the key to outperforming is to sell your losers quickly…
- We’ve had few losers this year, but let’s use Tattooed Chef ($TTCF) as an example.
- It was always a low-conviction speculative bet, so we only bought a small amount of it.
- After reading negative research on the stock, I took it off the board even though it was slightly down from where we bought it at, which was good because it’s traded down even further since.
- By cutting early, our losses were minimal both in percentage and size.
…and hold onto your long-term winners.
- For our winners, there are generally two types of companies we’ll be buying: under-valued companies and long-term growth companies.
- Under-valued companies are those whose stock I believe to be undervalued, but whose business I don’t necessarily have an extremely long-term bullish view about. I will generally have a price target for these, above which I will start selling.
- Long-term growth (and compounding) companies are those I believe will grow in a transformational fashion over the next 5-10 years. I may have a price target on them, but tend to not sell them even if they go even up to 30% over my target valuation. This is where we “let our winners ride.”
Should we sell $SPOT?
- $SPOT is now trading for 19.3x forward Gross Profit, which is where I would say it is “fairly valued” and may not have huge short-term valuation upside from here. I will consider selling off some of the position, but for now I am not selling it yet because it looks like a long-term growth company.
- Podcasts are currently under-monetized and $SPOT could multiply revenues if it successfully builds its creator-advertiser-listener network.
- The one risk is that $AMZN is in talks to buy Podcast maker Wondery, so it looks like they’re getting serious about competing in the audio space. Good thing we also own a bunch of $AMZN on the Big Board…