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Spotify – preparing for a stock market splash

3rd Apr 18 7:37 am

The music giant will IPO today

Spotify launches directly onto the New York Stock Exchange today, and this week produced a financial outlook for 2018. The company expects revenue growth of 20-30 per cent in this financial year, but still expects to book an operating loss of €230-330m.

This follows hot on the heels of an amendment Spotify had to make an amendment to its SEC registration document last Friday. The music streaming service had to reduce its tally of total users by 2m (to 157m), after discovering a number of people were fraudulently supressing ads without paying for the Premium ad-free service.

Laith Khalaf, Senior Analyst, Hargreaves Lansdown: “Spotify is about to make a splash on the stock market, and has chosen to simply dive straight into the New York Stock Exchange, rather than being lowered in gently by the usual consortium of investment banks. This approach will save the company money, but will probably lead to volatility when the stock starts trading, as the market tries to find a price it’s comfortable with.

“The fact the company isn’t turning a profit means the price discovery mechanism of a direct float is even more likely to be choppy. That’s because investors are going to have to choose from a host of secondary valuation measures in the absence of a traditional price earnings ratio to latch onto.

“Indeed it may be some time before Spotify is profitable, as the company is resolutely committed to prioritising growth over profit, and will be channelling money into investing in services for its users, and building on its scale. This makes sense as a business plan, but with profits in the long grass it does make the stock particularly susceptible to swings in sentiment, and to any perceived failure to deliver on growth.

Unlike its main competitors Apple and Amazon, Spotify is focused on music streaming, so it doesn’t benefit from the network effects of a wider ecosystem. However the company has already carved out a dominant role, and has demonstrated its ability to leverage scale by renegotiating agreements with music labels, boosting its gross margin from 12 per cent to 21 per cent since 2015.

Spotify comes with a great story, a strong brand and a robust growth profile, but with its fair share of risks too. Investors should ensure any investment in Spotify doesn’t make up an over-sized part of their portfolio, and that they appreciate the potential downside as well as the company’s growth prospects.”

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