Spotify Listing on NYSE - Quick FactsNews, research and market information provided by Bouchard Fintech
The music streaming success known as Spotify is about to make its grand entrance onto the publicly traded space. The big splash is set for the coming days and the company will be listed on the NYSE.
Spotify was started over ten years ago and is based in Sweden. The basic service is offered at no cost but the company also has a premium offering whereby users have added features for a fee. Amazingly, over these years they have signed up over one hundred and fifty million users. Of those, close to half of them have upgraded to the paid premium service. Those are noteworthy accomplishments by Spotify.
Given the popularity of the service and the number of paying customers, it should come as no surprise that Spotify is currently valued at somewhere between twenty and twenty-five billion US dollars.
Still, it should be noted that Spotify is not a profitable company. Rather, Spotify has a loss of over one billion dollars just in the last fiscal year. This fact is surprising but also challenging for investors. A company with such user acceptance looks good but because it is not profitable it makes its valuations a tricky matter. Then there is the notable competition to Spotify from such business giants as Amazon and Apple. Those are noteworthy competitors as both are hugely successful and both have vast resources at their disposal.
Now there is an interesting twist in Spotify's approach to issuing and pricing their stock. To begin with, Spotify is not planning to issue new stock. Rather, they will be selling shares that are currently held by their private investors. This fact means that there is no initial set price to the stock when the company goes public. Why are they doing this? It appears that Spotify can actually save money going this route. At the same time, such a move is likely to impact the demand for the shares and therefore cause unpredictability in share prices.
Given the non-profitable nature of the company it would be good to look at why they are going public and why are they doing so now. Bouchard Fintech has dug deeper and here are some facts that have been gleaned.
The investors at Spotify were promised that they will be rewarded for their investments and their commitments. Now Spotify is set on keeping that part of their promise. Additionally, the company is looking at a new infusion of capital in order to grow and expand the business.
Still, going public comes with a whole host of issues and challenges and Spotify will have to learn to adapt to the new reality. Additionally, with the new capital there are sure to be new demands from investors to see real progress, expansion and, ideally, profits. Historically, investors expect results quickly and tend to be rather impatient to see positive and concrete results.
Checking into what financial experts and analyst are saying, it is safe to say that Spotify may well hold onto its twenty to twenty-five billion dollar valuation, at least in the preliminary stages. Given the recurring losses over its history and given the massive losses from the previous year, it will be far more difficult to predict valuations further down the road.
Another challenge for Spotify is in its core business. It turns out that Spotify incurs greater costs that it generates in revenue. The fundamental problem is that when the company covers its costs and then also pays royalties the net result is a loss. Spotify has worked exceedingly hard to reduce that difference but has not quite made it yet. These critical facts are bound to create concerns for investors and the company's future depends on whether or not they can turn their ship around and go from current losses to profits.
If investors believe that Spotify can become profitable, they will still be concerned about Spotify's ability to fight off its deep-pocketed competitors.
Investors will be weighing up the potential for growth against the fact that 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 in the near term and fend off bigger rivals such as Apple and Amazon.
Bouchard Fintech has looked closer at both the strengths and the weaknesses inherent in Spotify's position. On the strengths side, it is notable that Spotify has increased its revenues significantly over the past five years. Revenues were increased some five-fold between 2013 and 2017. Spotify has also expanded its user base to about 170 million subscribers. They have also managed to sign up more users to their paid premium service.
Additionally, Spotify has managed to capture some forty percent of the music streaming service. Those are truly impressive numbers! Spotify has also reached a position of real strength as it has become a dominant actor in this specialized field.
When it comes to weaknesses there are some that stand out and others that are more subtle. A notable challenge is converting more of their free users to paying customers. They continue to grow their paying customer base but almost half of their current users have not converted. Then there is the obvious threat from current and future competitors. Global companies already have their own music streaming services and both Apple and Amazon could pour billions of dollars into this field should they decide to more actively challenge Spotify. It is noteworthy that both of those challengers actually offer devices that come with their own music streaming services already loaded.
An issue that can be both a positive and a challenge has to do with creating new content. Many successful providers of entertainment offer both licenced content and new original content too. Spotify will likely go down this path too since they are already offering their own podcasts and partnering with performers to create new content for them.
In conclusion, the experts at Bouchard Fintech have looked at a number of other examples of companies, roughly similar to Spotify, that have gone public. While no two companies or situations are identical, it is noteworthy that other such public offerings ended up being unpredictable. Some companies managed to list and then increase in value while others lost significant valuations afterwards.
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