Spotify goes public in an unconventional IPO

Spotify's public offering could be music to investors ears.It's a household name that revolutionized the music...

Posted: Apr 3, 2018 12:31 PM
Updated: Apr 3, 2018 12:31 PM

Spotify's public offering could be music to investors ears.

It's a household name that revolutionized the music industry, outmaneuvered larger rivals and still has a fast-growing revenue stream.

But an unusual IPO process has analysts effectively throwing up their hands about what to expect when the streaming music service goes public Tuesday. They don't even know what to call it.

"Officially we are not even calling it an IPO," says Matt Kennedy, an analyst at Renaissance Capital, which manages IPO-focused exchange-traded funds.

Unlike traditional IPOs, Spotify will not raise new capital. Instead it will simply list existing shares directly on the New York Stock Exchange without relying on underwriters to help assess demand and set a price.

Analysts have pinned the price target for the stock at anywhere from $160 to $220 per share. Spotify has said the price and volume of trading "may be more volatile" because of the direct listing approach.

Daniel Ek, Spotify's CEO and cofounder, told investors last month that part of the goal is to ensure employees and longtime shareholders can sell stock on day one if they choose. If it were a typical IPO, they'd have to wait until the share lockup period ends to sell their stock.

"We have allowed shareholders and employees to buy and sell stock for years," Ek said. "That shouldn't stop just because our stock is more widely owned."

But what's good for existing Spotify shareholders could be bad for those who invest once the company goes public. A huge number of shares hitting the market all at once could sink the stock price.

"If insiders decide to dump their shares, early investors could see massive losses," Kennedy says.

Related: Inside the war between Spotify and Apple

The uncertainties of the direct listing aren't the only challenge for Spotify. The decade-old company continues to face stiff competition from the likes of Apple, Amazon and Google. It also bleeds money from the cost of licensing content.

Spotify expects its financials will improve, however. In a regulatory filing last month, Spotify said it predicts sales for 2018 will grow as much as 30% to about $6.5 billion. It projects operating losses will decline from about $460 million last year to just north of $400 million this year -- with the cost of the public listing accounting for as much as $50 million of that.

Meanwhile, Spotify's streaming service has the largest audience. It had 71 million paying customers at the end of 2017, roughly twice the number of its nearest rival, Apple Music. Spotify expects its audience to grow to as much as 96 million by the end of this year.

"It's significantly stronger than Snap and significantly stronger than Blue Apron," says James Gellert, CEO of RapidRatings, which rates the financial health of public and private companies. Snap and Blue Apron had strong IPOs and then struggled mightily since their stock market debuts.

Spotify is going public at a time when there is pent-up demand for new tech IPOs.

"Even with all the buzz that it's going to be a great tech IPO year, they're still few and far between," Gellert says.

Case in point: Dropbox, another mature but unprofitable billion-dollar tech company facing a similarly daunting list of rivals, is up more than 40% from its IPO last month.

Mississippi Coronavirus Cases

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Cases: 501097

Reported Deaths: 9990
CountyCasesDeaths
Harrison34338538
DeSoto32117403
Hinds31939628
Jackson24494382
Rankin21995390
Lee15543235
Madison14581280
Jones13851242
Forrest13453251
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Clarke292494
Calhoun279446
Holmes267987
Smith264050
Yalobusha234047
Tallahatchie228051
Greene219348
Walthall218763
Lawrence212940
Perry205556
Amite205156
Webster202946
Noxubee186740
Montgomery179656
Jefferson Davis171743
Carroll169138
Tunica159839
Benton148838
Kemper141941
Choctaw133426
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Humphreys129538
Franklin120228
Quitman106428
Wilkinson105139
Jefferson94534
Sharkey64120
Issaquena1937
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Alabama Coronavirus Cases

Cases: 819597

Reported Deaths: 15406
CountyCasesDeaths
Jefferson1147901924
Mobile725791338
Madison52306697
Shelby37597350
Baldwin37245552
Tuscaloosa35101612
Montgomery34106740
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Chilton6641162
Russell636659
Franklin5959105
Chambers5607142
Marion5005127
Dallas4973200
Pike4795106
Clarke475584
Geneva4571127
Winston4516103
Lawrence4321117
Bibb425186
Barbour357776
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Pickens316284
Henry312666
Hale311388
Cherokee302860
Fayette292880
Washington251551
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Crenshaw245275
Clay243368
Macon234663
Lamar224147
Conecuh186153
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