22.02.18 | Spotify's weird IPO

By Jessica Sier 4 February 2018 2 min read
  • Published 22 February, 2018

We hear that bidding for Spotify’s private shares are heating up ahead of the Swedish company’s unusual IPO, slated for late next month.

One private trader estimates Spotify’s market cap will be around $US21.5 billion; larger than Snapchat’s post-IPO valuation of roughly $US20 billion.

Typically an IPO involves sellers (Spotify, its founders and early investors) hiring investment banks who go out into the market and shop the shares and build up demand. That usually determines a tentative price that will be offered on Day One of trading.

But Spotify is skipping the roadshow part, instead just listing straight onto the New York Stock Exchange; letting the market work out the value on its own.

"It's like saying, 'I’ve got the coolest house on the block. Everyone will wants to buy it, so why give a cut to a broker,'" George G.C. Parker, a finance professor at Stanford Graduate School of Business, told NPR.

"To me, that is very analogous to a person that puts a sign out on the street and says 'this property is for sale by the owner.”

But because there isn’t a tentative price for Day One of trading, it’s likely there might be some wild price swings as public investors decide what they're willing to pay.

Facebook, Twitter and Snap all had plenty of secondary market action ahead of their IPOs and withstood some severe volatility.

But by avoiding bankers, some analysts have suggested Spotify might save as much as $US300 million in fees. (They are still using some bankers though…)

But we are wary.

Competition in music-streaming is fierce. While Spotify has 70 million subscribers and Apple Music, its nearest competitor, has 30 million, Spotify’s monthly growth rate of 2% is outstripped by Apple’s 5% monthly growth.

Spotify boasts 140 million users, but most of them don't pay. They listen to the ad-supported stream. Ad revenue is only $US300 million a year — a fraction of what the service truly costs - making it still an unprofitable company.

It also has to rely heavily on its partnerships: Spotify pays $US0.70 in royalty payments for every $US1 earned.

Private to public share trading is becoming more commonplace in technology companies and is something we are keeping an eye on as the industry matures.

Philanthropy

Also, if you’re interested: Bill and Melinda Gates have released their Annual Letter regarding their philanthropy efforts. There are some great themes in there about Trump policy and global overpopulation.

There is also some great insight into how they feel about their relationship with each other, both personal and professional.

Thanks for the calls everybody, keep them coming.

Enjoy your Thursday.

Words by
Jessica Sier Right Chevron

Jessica Sier is a financial journalist who currently heads up Spaceship's content. Prior to that she was a reporter at the AFR where she discovered breaking down financial bulls**t was a public good.

22.02.18 | Spotify's weird IPO