Media Moves

Coverage: Spotify goes public, closes above offering price

April 4, 2018

Posted by Chris Roush

Screen Shot 2018-04-03 at 9.12.34 PMSpotify enjoyed a successful Wall Street debut on Tuesday, garnering a $26.5 billion valuation and closing at $149.01, about 13 percent more than the $132 reference price set by the New York Stock Exchange based on how the stock traded on private markets before public trading began.

Hamza Shaban and Renae Merle of The Washington Post had the news:

Spotify’s stock started the day off strong at $165.90 and experienced stable trading before falling later in the day. Analysts had anticipated volatility and perhaps irregularities during Spotify’s market debut because the company chose an unusual path to go public.

The music streaming giant, which trades under the symbol SPOT, bypassed many of the traditional steps of a Wall Street public offering. Company executives did not conduct a roadshow to persuade big institutional investors to buy shares. Its chief executive even skipped the usual New York Stock Exchange ritual of ringing the opening bell.

“Normally, companies ring bells. Normally, companies spend their day doing interviews on the trading floor touting why their stock is a good investment,” Daniel Ek, Spotify’s founder and chief executive, said in a blog post Monday. “As I mentioned during our Investor Day, our focus isn’t on the initial splash. Instead, we will be working on trying to build, plan, and imagine for the long term.

What made Spotify’s public debut most notable, however, was how it offered its stock. Rather than issuing new shares, the Swedish company instead conducted a direct listing, in which no money was raised. Existing shares were sold by employees and investors. In part because of the unorthodox public listing, the company’s stock did not begin trading until a few hours after the opening bell, as potential sellers and buyers were matched up. Spotify’s public listing was the eighth largest in the tech sector, according to Dealogic.

Nick Statt of The Verge noted the company has an uncertain future:

While Ek says Spotify isn’t raising capital with its IPO, the company is certainly in need of some cash. Although Spotify earns $5 billion a year in revenue, it pays out more than three-fourths of that in royalties to labels, producers, songwriters, and artists. The Big Three — Universal Music Group, Sony Music Entertainment, and Warner Music Group — control a vast majority of that ecosystem, leaving just a small amount of revenue and zero profit for Spotify to recoup from its 70 million paying subscribers. Though Spotify counts nearly 90 million free listeners, it only makes around 10 percent of its total annual revenue from advertising to those free users.

That puts a lot of pressure on Spotify to ensure investors that it can continue to grow, even as Apple Music closes the subscriber gap. Apple’s streaming product is no less economically viable, but the iPhone maker does not at all rely on it to make money, with the company’s vast and robust hardware ecosystem generating a large majority of its record revenues and profits. Though Spotify is cutting its losses thanks to renegotiated deals with record labels, it still loses close to $1.5 billion a year. Spotify has yet to ever make a profit.

If Spotify cannot find additional revenue streams or find ways to turn a vast number of free subscribers into paid ones, the streaming service may not have a bright future except as a kneecapped extension of the existing music industry, the majors of which own about 16 percent of the company as it stands today. But the music industry needs streaming services like Spotify just as much as much as the streaming services rely on labels. That symbiotic, but at times antagonist, relationship forms the pillar of the current music industry. Whatever happens to music creation and distribution in the future, Spotify will surely play a major part, whether or not it manages to transform into a profitable platform.

Shira Ovide of Bloomberg Gadfly wrote that its small number of shares available make its valuation unreliable:

Spotify’s internal assessment of the company’s fair value was $50.70 a share a little more than a year ago, and the stock is now trading at three times that level. It’s an impressive jump in value for a company that took a risk by ditching a conventional IPO and has lingering questions about its business model.

But we need to hold off on declaring Spotify’s direct stock listing a victory. A fair assessment will take months. And in one respect, Spotify’s first day as a public company was a failure. And it’s all because of the “float.”
That term refers to the percentage of a company’s total stock available to buy and sell. At the first public trades of Spotify on Tuesday, about 5.6 million shares changed hands, according to a company representative. That is an incredibly small 3.1 percent of Spotify’s 178 million total outstanding shares. 1 This is an irresponsibly small slice of Spotify to trade out of the gate.

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