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Spotify – smash hit or flop?

2nd Mar 18 10:06 am

Here’s what a top analyst thinks 

Spotify has published its registration statement in advance of listing directly on the New York Stock Exchange, giving investors a peek at its financial performance so far, and its prospects for the future.

Laith Khalaf, Senior Analyst, Hargreaves Lansdown:

‘Spotify is cutting out the middleman and heading straight for the stock market, which reduces the costs of floating, but will probably lead to volatility in the share price too. 

Spotify comes with a great story and strong brand attached, but for investors the risks are amplified. This is a company that hasn’t made a profit yet, and will face intense pressure from competitors at one end and from its suppliers at the other.

Indeed just four music companies control the rights to 87 per cent of the music streamed on Spotify, which gives them a healthy bargaining position when it comes to getting their pound of flesh from Spotify’s revenues.

Likewise Amazon and Apple are not competitors to be taken lightly in terms of resources or innovation. These companies also produce hardware like the iPhone and Amazon Echo which can come pre-loaded with their own music-streaming services, giving them an advantage over Spotify.

Technology and celebrity can both be fickle beasts, as evidenced by Snap’s recent share price fall on the back of one fairly innocuous Kylie Jenner tweet. Spotify is also vulnerable to the kangaroo court of social media if it happens to displease one of the recording artists in its catalogue.

Like Snap, Spotify isn’t profitable right now, so shares will trade hands based on hopes for the future. This makes it particularly susceptible to swings in sentiment, and so relatively minor bad news could take a hefty toll on the share price. 

Spotify’s future rests on building user numbers, so anything which could undermine that journey is naturally going to unsettle investors. That risk is magnified because some of Spotify’s licensing agreements are related to performance indicators. So failure to deliver on audience numbers could result in a double whammy of dented revenues and rising royalty rates. The fact Spotify also claims to have over 40 per cent of global market share in streaming revenues begs the question just how dominant it needs to be to break even.

It’s also worthy of note that Spotify’s founders are still keeping tight control of the company by supplementing their shareholdings with new beneficiary certificates which give them additional voting rights. Share ownership by management is generally positive because it gives them skin in the game, but schemes like this give the directors greater power than their shareholding dictates. That may well allow them to stay true to their vision, but it’s unlikely to play well with prospective institutional investors who will want their say in how the company is run.

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