Three Stocks To Buy Ahead Of Earnings

Over the next fortnight, each company below will report earnings for Q4 and the full year 2024. Investors are expecting great results but I expect these companies to deliver and more. They have already flagged their expectations that 2025 is going to be a year of great progress. They are big enough to be at that sweet spot when progress from upstart to household name is underway.

I love Spotify with nearly 7,200 songs on my liked list. As I write I am listening to a string quartet playing Haydn. Next on my list is Dean Martin followed by Skeeter Davis. My list is nothing if not Catholic and if I want to find more amazing songs I just tap into my personal customised Spotify radio learning from whichever song or artist I used to launch the radio. My greatest loves are Elvis, country and swamp pop but there is loads of other stuff. Listen to a Quebecoise called Chantal Pary. I defy you not to love her voice. Like Rod Stewart. Try an album called A Spanner in the Works. It is sensational.

My engagement with Spotify far outstrips my engagement with any other streaming site or social media platform. An analyst on Seeking Alpha says something similar.

I love everything about Spotify (NYSE:SPOT). From a product perspective, as my 2024 Spotify wrapped highlighted, I have consumed ~41,000 minutes of the platforms content during the months January through December, equal to about ~680 hours of content. Estimating that I sleep approximately 7 hours a day, it is suggested that I use Spotify for more than 10pc of my waking hours. This is more time than what I spent on Google (GOOG), Meta Platforms (META) and Reddit (RDDT) combined. And still, 15pc of the world’s population use Spotify more than I do. From a business perspective, Spotify is at least as impressive: Indeed, Spotify stands out as a fantastic business as I am pointing out the company’s sustained high-growth trajectory, pricing power, and profitability improvements. Recently, Spotify has achieved a gross margin expansion to levels above 30pc, earlier than anticipated. And with efficient cost management, tiered pricing, as well as growth upside in both premium subscribers and ARPU [average revenue per user] it is projected that Spotify’s free cash flow will exceed €3.6bn by end of 2026—which should support healthy capacity for sustained shareholder returns through the next few quarters.

The reason why Spotify is such an amazing business for investors is found in the company’s platform-based business model: Spotify doesn’t need more capital or operational resources to drive higher revenue because its growth strategy leverages scalability and existing infrastructure. The platform’s core features—music streaming, podcasts, and audiobooks—are digital and require minimal incremental costs to scale. At the same time, revenue growth is fueled by pricing power, ARPU increases, and the addition of new subscription tiers, all of which maximise monetisation from existing users without significant overhead. Furthermore, Spotify’s AI-driven personalisation and programmatic ad tools enhance engagement and ad revenue streams, allowing the company to generate higher margins without expanding its operational footprint. This efficient, consumption-based cost structure ensures Spotify can grow revenue organically while maintaining strong profitability.

Seeking Alpha, 15 December 2024 (Cavenagh Research)

I have a good feeling about Applovin.

We continue to expect 4pc to 5pc quarterly growth through self-learning and market growth, with occasional step changes resulting from enhancements to our AXON algorithm. This quarter, we saw one of those step changes, with meaningful growth driven by advancements to AXON. While we can’t predict the timing of these breakthroughs, we’re in the early stages of AI software development, both within our company and in the broader industry. We expect ongoing research advancements to continue driving our technology forward.

While we remain confident in 20pc to 30pc growth for mobile gaming advertisers alone, we’re also exploring new areas, as shown by our recent e-commerce pilot. Early data has exceeded our expectations, with the advertisers in the pilot seeing substantial returns, often surpassing those from other media channels, and in many cases, experiencing nearly a 100pc incrementality from our traffic. We’re increasingly confident this vertical will scale significantly in 2025 and become a strong contributor for us over the next year and beyond. To support this, we’ve streamlined resources and are reallocating talent from other initiatives to our e-commerce go-to-market team.

In the next few quarters, we’ll launch a self-service platform, opening global opportunities for advertisers of all sizes. Next, an update on our earnings communication. While we’ve been issuing quarterly shareholder letters, we believe businesses are built over years, not quarters. And to align with this vision, we will shift to an annual shareholder letter.

Financial results and guidance will still be released quarterly, but each year, we’ll provide a comprehensive summary of the past year and our plans for the future in the form of an annual shareholder letter. Finally, I’d like to thank our team for their outstanding execution and relentless drive. After 13 years, I’m continually inspired by the passion and excellence that define our company. We’re in the early stages of building one of the world’s most innovative technology platforms.

The future is incredibly bright, and we have the right team to seize every opportunity in front of us.

So e-commerce is still in pilot, as we touched on last quarter. I’ll say before jumping into impact this quarter, it’s a super compelling product. Our team has done an amazing job building it.

In all my years, it’s the best product I’ve ever seen released by us, fastest growing, but it’s still in pilot. So compared to the scale of our business inside gaming, it’s too early for e-commerce to make a financial impact that’s material. The step-up this quarter was entirely on the gaming side, which obviously is the vast majority of our advertising business today. We’ve talked for multiple quarters now about how there’s a long runway in gaming.

The gaming category has a need for more UA (user acquisition) dollars spent, but it’s constrained by the return on ad spend goals of the advertisers and the technology capabilities that a platform like us has today. Now, our technology continues to improve. We’ve got a long roadmap of enhancements that we can deliver to this platform. Because like I said in the talk script, these AI technologies are just really, really early in existence, both internally and externally.

And all research advancements are going to let us really expand the business inside the gaming category. E-commerce, on the other hand, is looking so strong that it’s something that we think will be impactful to the business financially ’25 and then for the long term.

Adam Foroughi, Applovin, Q3 2024, 6 November 2024

As I suspected some people think the impact of DeepSeek might be beneficial for Palantir.

The market is misjudging DeepSeek’s impact, as its AI breakthrough actually strengthens Palantir’s position rather than weakening it. With AI costs decreasing, the real value lies in deployment, security, and integration — areas where Palantir excels. As the company continues to expand its government contracts and solidify its role in mission-critical AI, it stands to benefit significantly from the accelerating AI revolution.

Seeking Alpha, 29 January, Youannis Zourmpanos

This commentator is sceptical of some of DeepSeek’s claims.

The claim that DeepSeek developed R-1 for just $5.6m is unrealistic, given the standard costs of training advanced AI models. Training a model at GPT-4’s scale typically requires tens of thousands of A100 or H100 GPUs, which rent for around $2–$3 per hour, leading to millions in GPU costs alone over several months. Data acquisition and preprocessing can cost $10–$50m, given that OpenAI reportedly spent $100m+ on GPT-4’s training. Even smaller-scale models like LLaMA 2 (13B) require thousands of GPU hours, and DeepSeek’s R-1, which reportedly competes with GPT-4, would demand even more.

The only plausible explanations for DeepSeek’s low figure involve hidden subsidies, government-backed infrastructure, or strategic cost misrepresentation to project superiority. China’s AI initiatives benefit from state-funded energy discounts, government-run supercomputers, and national security-driven support, significantly reducing apparent costs. Without full transparency, the true cost of R-1 is likely in the tens or hundreds of millions, making the $5.6m figure more of a geopolitical narrative than a financial reality.

Seeking Alpha, 29 January, Youannis Zourmpanos

As the models increase in size, prices decrease, and organisations start to look toward platforms that make AI most useful, Palantir is right in the middle of the transformation. Efficiency from DeepSeek will further empower Palantir to provide its AI-enabled platform with reduced infrastructure costs and thus seamless adoption for enterprises and governments worldwide. This cost efficiency further cements Palantir’s role as an enabler for the deployment of AI rather than an LLM* competitor and facilitates the firm in capturing the increasing demand for AI-integrated operational intelligence.

*LLM stands for large language model, which is a type of artificial intelligence (AI) that can process, understand, and generate human language. LLMs are trained on large amounts of data, such as text from the internet, to learn how language works. 

History has shown that centralised regimes cannot sustain the momentum of innovation for a long time, as was shown in the case of the USSR’s failed semiconductor race. While DeepSeek shows China’s power in AI, this cannot be maintained long due to systemic inefficiencies and information control. In return, Palantir can be a beneficiary of the democratisation of AI. As the commoditisation of AI models advances, integration into enterprise workflows is where Palantir will see the next phase of growth. It might be a reason the market views DeepSeek as a threat, but only for accelerating Palantir’s dominance in AI-driven decision-making.

The more commoditised AI gets the more valuable Palantir’s ability to scale, deploy, refine, and operationalise it. Far from undermining Palantir, DeepSeek’s breakthroughs reinforce its centrality in the AI ecosystem: shifting value away from raw model creation to a real-world application category in which it is largely without peer.

Seeking Alpha, 29 January, Youannis Zourmpanos

Share Recommendations (30 January 2025)

Spotify SPOT

Applovin APP

Palantir. PLTR