Listen Here: Spotify Goes Public
The multi-billion dollar music streaming service, Spotify, has gone public after nine years of service. Within six days after filing for public listing, Spotify became a tradable security on the New York Stock Exchange (NYSE). On April 9th, 2018 Spotify (SPOT) went public in a unique manner that caused a buzz between investors by not partnering with an investment bank to underwrite their untraded stocks. SPOT opened at $165.90 and closed their first day at $149.01. Currently, it is extremely hard to predict the future of Spotify’s earnings since following an untraditional public listing. Spotify followed a direct listing method when becoming public. This affects banks since in traditional initial public offerings (IPO)’s banks are the underwriter for the company to help them raise capital in order to expand. However, this wasn’t the case for Spotify they became public because it was just the next step to “success” for them in the average path for a company. Spotify’s public appearance is even more unique than a simple direct listing because of the dual practices of direct listing and not having investment banks underwrite their stocks.
The typical IPO process would begin by an agreement with an investment bank to determine the company value in order to appropriately number and price the shares of the stock being issued. The bank completes the underwriting process, which is when the bank becomes the owner of all unsold shares and assumes the legal responsibility for the shares. This is so the underwriter will sell the share to the public for more than originally paid in order to gain profit. The relationship between the investment bank and the individual company are often highly valued. This calls for the investment bank to make a company’s value determination and in turn setting the stock’s offering price used for reference point when initially going public. Investment banks will also buy and sell the stocks in order to balance the stock price to keep it in equilibrium and less volatile.
Spotify chose a direct listing approach instead of the usual IPO listing. This is different because the company is both listing as well as offering shares at the same time with no help from an investment bank. This is because Spotify does not need capital currently. The dynamics of Spotify’s direct listing causes them to save money without investment banks underwriting their stocks but causes for a lot of fluctuation in their stock’s price.
The company has two advantages over typical companies going public. The main benefit, compared to others is the lack of need for assets and capital. Another benefit for Spotify is that the company is vastly known and the basic business model is universally comprehended by investors so the executives are able to skip the traditional “roadshow” of going public. This is where the board has to explain the in-depth workings of a company and what exactly it does, which wastes time and money and can potentially decrease investing.
Spotify, like many other companies, also has a few disadvantages. Their competition is large with low barriers of entry. Low barriers of entry means when However, Spotify controls 41% of the U.S. music streaming market. Although it has grown to approximately 71 million paying subscribers and 159 million monthly active users there are many well known and used competitors such as, Apple Music, Amazon Prime Music, Pandora, Soundcloud, and Tidal. All the competitors have unique characteristics but overall similar functionality. A major disadvantage to streaming companies in general is the lack of ownership to the music, which causes the operating costs to outweigh the revenue. Spotify has yet to make a profit even with the large audience and popularity amongst music listeners. Their recent partnership with Hulu has caused for an increase in subscribers but not enough to turn a profit.
When investors decide which stocks to invest in, especially within the early stages of the stock’s maturity, an important aspect typically is deciding based upon a stock’s beta. A beta, is the measurement of the volatility and risk of a security or an individual’s investment portfolio when compared to the market as a whole. The beta apart of the capital asset pricing model (CAPM) that calculates the expected return of the security. When a stock first becomes public there is no beta because there is no history for the assessment to be based off the stock’s trading tendencies.
Spotify is changed the way the music industry was done and now it is infiltrating and changing the stock trading industry. Being a new company on the stock exchange makes it difficult to predict the outcome of this listing, or even the trends in the market in regards to Spotify. At times, the market can become volatile for individual listings due to outside information and external factors, however, generally the predictions of each listing can be predicted. Spotify will soon have enough of a history to determine the beta, which is the number formulated by the volatility or security risks of the stock in order for conservative or aggressive investors base their investment portfolios on. Spotify, once stable, will offer investors a firm understanding of what the security has to offer to investors.
“Beta.” Investopedia, Investopedia.com. Web. 3 April 2018. https://www.investopedia.com/terms/b/beta.asp#ixzz5BpINcaBA
Castillo, Michelle. “How Spotify’s Direct Listing is Different From an IPO.” CNBC. CNBC.com. Web. 3 April 2018. https://www.cnbc.com/2018/04/03/how-does-spotify-direct-listing-work.html
Snider, Mike. “Spotify Goes Public: What You Need To Know About The Music Steamer and Its IPO. USA Today. USATODAY.com Web. 3 April 2018. https://www.usatoday.com/story/tech/talkingtech/2018/04/03/spotify-goes-public-what-you-need-know-music-streamer-and-its-ipo/480318002/