These 2 Growth Stocks Are Finally Churning Out Profits

The era of growth stocks getting a free pass on profitability appears to be largely over. Growth has slowed for many pandemic highfliers, bringing the bottom line into focus for investors. The companies that can successfully bring down costs while continuing to grow will likely be rewarded by the stock market.

Two once-unprofitable companies that have turned things around are Uber (NYSE: UBER) and Spotify (NYSE: SPOT) .

Uber

Mobility and delivery giant Uber has been producing positive adjusted earnings before interest, taxes, depreciation, and amortization ( EBITDA ) for a while, but the company is now also profitable on an operating basis. Uber produced a GAAP operating profit of $172 million in the first quarter of 2024. Net income remained negative due to unrealized losses on equity investments, but the business itself is operating in the black.

This marks quite a turnaround from Uber's pre-pandemic days. In 2019, the last full year before the pandemic rocked Uber's business, the company reported a staggering $8.6 billion operating loss on more than $14 billion in revenue.

Revenue growth has been part of the equation. Uber generated revenue of $10.1 billion in the first quarter of 2024, more than triple what it produced in the same quarter of 2019. The company has also kept costs in check. Even as revenue tripled, Uber's operating expenses grew by just 55% between the first quarter of 2019 and the first quarter of 2024.

While Uber's profits are moving in the right direction, the company and stock still face some challenges. First, Uber's business model depends on classifying its drivers as contractors, a practice that's coming under an increasing amount of scrutiny. Some municipalities, including New York City, have set minimum wages for app-based delivery workers, leading Uber to implement changes that limit when drivers can work.

Second, Uber stock looks expensive. With a market capitalization of about $140 billion, shares trade for around 75 times the average analyst estimate for adjusted earnings. Overall revenue grew by 15% year over year in the first quarter of 2024, a solid pace for sure, but perhaps not fast enough to justify such a lofty valuation.

After years of massive losses, Uber is finally a profitable company. Despite those profits, the stock remains a somewhat risky bet.

Spotify

Music streamer Spotify operates in a tough industry, paying enormous royalties on music with little control over the rates. The company has done two things to end its long period of losses. First, it has pushed to convert ad-supported users to premium subscribers. Second, it slashed costs through substantial layoffs.

Spotify had 246 million premium subscribers at the end of the second quarter of 2024, along with 393 million ad-supported monthly active users. The premium business now generates more than seven times the revenue of the ad-supported business and is growing faster.

This shift to premium has enhanced Spotify's gross margins. Total gross margin reached 29.2% in the second quarter of 2024, with the premium business sporting a gross margin of 31.4%. Meanwhile, the ad-supported business eked out a gross margin of just 13.4% and is far more volatile.

Spotify's operating expenses plunged 16% year over year in the second quarter, reflecting recent layoffs. It announced a 17% staff reduction late last year, a necessary move to bring costs down.

Spotify's focus on efficiency and profitability is now paying off. The company produced an operating margin of 7% in the second quarter and expects this metric to rise above 10% in the third quarter. Free cash flow has also exploded. Spotify churned out $490 million in free cash flow during the second quarter, more than doubling from the first quarter.

Valued at $66 billion, Spotify stock trades for around 60 times the average analyst estimate for full-year adjusted earnings. Just like Uber, the stock is priced at a hefty premium. However, given the potential for Spotify to continue to grow profit margins as it pushes its premium subscriptions, its stock looks interesting for investors not overly concerned about valuation.

Timothy Green has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Spotify Technology and Uber Technologies. The Motley Fool has a disclosure policy .