Spotify is poised to make its stock market debut on Tuesday, in a flotation on the New York Stock Exchange that could value the company at $20bn-$25bn (£14.2bn to £17.8bn) according to analysts.
The music streaming business was launched 12 years ago as a free-to-use service, funded by advertising. Spotify now has 157 million customers, and has managed to convert 71 million of those into paying users of its premium subscription service.
However, Spotify has never made a profit, making it more tricky for potential investors to value the firm. It also counts the likes of Apple and Amazon as competitors, a daunting prospect given the depth of their pockets.
Here are some of the key questions as the Swedish firm prepares to go public.
What is different about this flotation?
Unlike most companies that float, Spotify is not issuing any new stock, which means it has not set a price for its shares in advance. Instead it is selling shares currently held by its private investors, rather than handling it in the usual way with the process managed by investment bankers. It will save the Swedish company money but it is likely to create volatility when the shares go live on Wall street (14:30 BST) as investors try to settle on a price. The company has made losses of nearly €1bn (£870m) over the past three years, so investors will not be able to rely on a traditional price earnings ratio as a guide.
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Why does Spotify want to float?
Spotify made a commitment to its original investors that they would have the opportunity to cash in their investment, and this is it. The flotation will help to fund expansion of the business, but it will also ramp up pressure on the management. By going public, Spotify’s strategy and performance will come under increased scrutiny, and investors will expect progress, fast.
What is it worth?
Analysts are predicting Spotify could be valued at $20bn-$25bn on its debut on the New York Stock Exchange but the reality is no one knows. It is more difficult to predict than usual, because no advance price for the shares has been set. Investors will be weighing up the potential for growth against the fact Spotify has failed to turn a profit in its 12-year existence. The company’s costs – including the royalties it pays to record labels and artists – are greater than its revenues, although that gap is narrowing. A successful float will depend on whether or not investors believe Spotify’s claim that it can become profitable and fend off bigger rivals such as Apple and Amazon.
Is Spotify really worth $20bn? Read more
What are Spotify’s strengths?
Spotify has proved able to drive strong revenue growth, with revenues rising from €746m in 2013 to a predicted range of between €4.9bn and €5.3bn last year. With an estimated 40% share of the global music streaming market, Spotify is the dominant player in the sector, increasing its bargaining power with labels and artists over the royalties it pays them. Meanwhile user numbers are expected to increase to 170 million this year, with paying subscribers expected to rise from 71 million to 90 million. One of the challenges will be persuading more non-paying customers to sign up for paid-for services.
What are the threats?
Simply put, it’s the potential for competition. Spotify is currently the market leader but tech giants such as Apple and Amazon have deep pockets and could cause some damage should they decide to mount a major challenge. Both companies already provide hardware such as the iPhone and Amazon Echo which are available with their own, pre-loaded music-streaming services. Spotify’s limited supplier base, with just four music companies controlling the rights to 87% of the music streamed on Spotify, is another risk, according to analysts at Hargreaves Lansdown.
What will it mean for consumers?
The flotation will mark a new era for Spotify but it is not yet clear what changes the firm has planned. Analysts say it will have to diversify over time, to ensure that it stands apart from rival streaming services. One option would to be produce more original content, following the video shot for Spotify by Taylor Swift for her single Delicate. Spotify has already moved into podcasts and producing original music.
How have other recent tech floats performed?
Recent technology floats have proved volatile and investors have been selling off shares in the wider sector, concerned by the prospect of greater regulation for tech firms such as Facebook. Cloud storage company Dropbox is up 40% since it floated last month, but shares in Snap – the company behind social media app Snapchat – are down 15% compared with their float price.
Spotify, the world’s largest music streaming service, made its debut on the New York Stock Market this morning with its reference price initially set at $132 a share, and trades opening at $165.90. That puts the company value at $29.5 billion, higher than what CNBC reported last month when shares were traded on private markets were for as much as $132.50 a share. Spotify’s last valuation was at $8.4 billion when it raised a financing round of $400 million back in 2015.
Sweden-based Spotify is available in 61 countries with an overall user base that includes ad-supported free listeners of 159 million, and 70 million paying users as of January 2018. The company was founded in 2006 by Martin Lorentzon and Daniel Ek, who remains its current CEO.
For its public offering, Spotify has taken an unconventional and somewhat risky approach called direct listing, a route normally taken by small-cap companies, usually in biotech and life sciences. It’s a less expensive alternative to an IPO where the business sells shares directly to the public without any intermediaries, but it also means drawbacks like no deal support from the bankers.
Spotify is going through a tremendous amount of cash
Ek explained his position in a company blog post published yesterday. “Spotify is not raising capital, and our shareholders and employees have been free to buy and sell our stock for years,” he wrote. “So while tomorrow puts us on a bigger stage, it doesn’t change who we are, what we are about, or how we operate.” Spotify is the biggest company to ever go public via direct listing, and the first on the NYSE.
Spotify’s IPO paperwork showed that it is going through a tremendous amount of cash — posting revenue last year of €4,090 million (nearly $5 billion) and a net loss of around €1,235 million (or about $1.5 billion) for the same period — but its gross margin is growing, thanks to newly negotiated licenses with the major labels. These deals not only reduce Spotify’s royalty payouts, but will allow the company to predict their music costs for several years.
However, there are obstacles for Spotify to dodge as it continues to grow. Recently, it had to crack down on users running modded versions of the app to stream music for free while blocking ads. Spotify’s IPO filing notes that about 2 million users are getting around ads on Spotify without paying, or about 2.3 percent of all free Spotify accounts. It also has some odd lawsuits still lingering around, like the one filed by Wixen Publishing over mechanical licenses to the tune of $1.6 billion.
Despite this, it’s impossible to deny Spotify’s success over the years as one of the earliest and most promising music streaming businesses. Its closest competitor, Apple Music, only has 36 million paid subscribers, although that number might surpass Spotify’s by this summer. But, even if that’s the case, Spotify is predicting it will be just fine in 2018 by continuing to focus on its central revenue stream of user subscriptions. The company is predicting as many as 96 million paid subscribers and a 30 percent increase in revenue to $6.6 billion by year’s end.
Spotify predicts it will add 26 million paying users this year
Bumping up subscriptions alone likely won’t fix the catch-22 of Spotify’s business model, where the more money it makes, the more money it pays out to the labels. It needs to find additional revenue streams or continue to work on reducing label payouts. The latter is a tough ask. Trying to appease everyone when no one is satisfied is not an enviable position for Spotify, but it’s the one they’re currently in. Artists are already only making fractions of a cent per stream on the platform (less than Apple Music but considerably more than YouTube), and labels are still slow to change old habits and recognize the new, modern market of music consumption. This doesn’t leave Spotify without options; it could give the labels greater equity, for example.
Ultimately, how successful Spotify’s public offering is will depend on whether investors believe there is a light at the end of the tunnel when it comes to profitability and how sustainable its business model is, not just for its own bottom dollar, but for the artists that are its lifeblood.
Update April 3rd, 12:50PM ET: The story has been updated to reflect Spotify’s opening trading price of $165.90 a share.
Spotify's stock kicks off unorthodox 'direct listing' at $165.90, then falls 6% in choppy trade
This is a dangerous sentence to write as a columnist who's supposed to have the answers, but here goes: No one knows for sure how Spotify's not-IPO will fare on Tuesday.
We've been writing for many months about Spotify and its relatively novel method of becoming a public company by declaring its shares available to buy and sell freely to all comers. My inbox has filled up for weeks with offers of "experts" to opine about Spotify or its unusual stock listing. And yet, there are absolutely essential details about Spotify's not-IPO that people outside the company don't and can't confidently predict. And in moments of honesty, the people closest to the company would have to admit this, too.
For starters, no one really knows at what price Spotify shares will change hands once the company makes its stock market debut. This is kind of true in all new stock listings, but it's especially true in Spotify's case. In the first two weeks of March, existing Spotify stockholders sold about 5 million shares at prices ranging from about $49 to $132 each, according to a Spotify regulatory document.
Spotify's Canyon The price of Spotify stock sales in private transactions has varied widely, and the gap widened in March Source: Spotify disclosures
Needless to say, that's a wide range that offers little insight into what price stockholders might take for their shares when Spotify flips the switch on Tuesday from a privately held company to a public one. This range of stock trading in March was even wider than share sales in January and February. And that big gap came from existing shareholders of the company, who presumably know more than the average man on the street about the company's inner workings or financial prospects. And yet there's broad divergence among them about the "right" price for Spotify shares. With this much disagreement about the value of a Spotify share, things could get very messy on Tuesday.
Spotify itself valued the company at $50.70 a share a little more than a year ago, and $120.50 a share in December, or a market valuation of about $22 billion. About half of the calculation of the recent share price, Spotify said, was based on the price in private stock sales. Although as noted above, recent private stock sales have produced wild variations in investors' value of Spotify shares.
Even hours before Spotify becomes a public company, the most basic question is unanswered: Will the unwashed stock market masses eyeball Spotify's (wildly divergent) previous stock trades and decide those are fair starting points for their own views of Spotify's value? Or will they vehemently disagree?
And no one knows the answer to the related question of how many shares of Spotify will be sold. In a conventional initial public offering, a company and its bankers decide ahead of time how many shares the company or existing stockholders will sell. This is all managed theatrics, but it's managed theatrics that are well understood in the financial world.
To the Moon In Spotify's own valuations of its share price, the company's value more than doubled from early 2017 to the end of the year Source: Spotify disclosures
At Spotify, none of that is happening. In theory, nearly all of the company's 178 million issued shares can be sold on Tuesday. If that happens and Spotify shares trade at the recent company-determined value of $120.50 a share, Spotify's not-IPO could amount to nearly $20 billion. That would be bigger than all but a handful of IPOs in history. (In the biggest IPO ever by value of shares sold, Alibaba Group sold about $25 billion in stock in 2014.)
I'm confident that not every Spotify stockholder will sell on Tuesday, but will it be closer to zero or to 178 million shares? That's a question mark. Spotify's advisers have been polling current stockholders to determine whether they're interested in selling shares now, and at what price. But if I were a Spotify stockholder, there's little incentive to tell bankers the truth. If there's a share price at which I want to sell, I'll just wait until the company is public and someone offers to buy at my dream price, and then I'll press "sell" on my E*Trade account.
All these unknowns may not matter. Spotify has good and expensive professionals working on the not-IPO, and those folks can handle a lot of curveballs in a new stock listing. If everything goes smoothly, and Spotify emerges this week as a richly valued public company, it's a good bet that other relatively young tech companies will want their own not-IPOs. The second or third direct listing will be easier than the first. But being a pioneer comes with risks.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
