Tuesday marked the first trading day of Spotify listed on the NYSE under the ticker symbol SPOT. Unlike a traditional IPO for large established companies, Spotify conducted a direct listing, meaning no banks underwrote the offering and no price was set ahead of the debut. Current shareholders sold their shares directly on the exchange. Why? Spotify wanted to democratize the process and they didn't need to raise fresh money through the offering as is often the case with an IPO.
This differs from “typical” IPOs whereby shares are offered to potential investors at a pre-determined price. In this traditional offering, a start-up hires bankers to find investors to buy its stock, a pre-qualified group willing to run the risk of taking on shares in a company that hasn’t traded openly. The investment bankers determine the right price for these shares, which can then be sold the following day on an open exchange like the Nasdaq or the NYSE.
The consensus in the market is still that direct listings are only feasible for a small group of companies that have similar attributes to Spotify, most notably wanting to be public but not needing to raise capital.
Despite initial concerns, the process turned out to be a positive one for the industry. While it took longer than usual for trading to commence, it was then orderly throughout. The NYSE set a reference price of $132 on Monday night based on previous trades on private markets, but ultimately the publicly listed price was based on investor demand. The stock first opened at $165.90 and progressively fell as the session progressed to end down more than 10 per cent at $149.01, meaning those early buyers suffered losses on paper. The shares however still closed almost 13% higher than the reference price.
The listing wasn’t sought to raise more capital, it was more a way to give a chance to the early investors to cash in their investment, strengthen the position of the Company with respect to competitors and put a step forward into growth.
Spotify’s market value stands at $26.5bn, making it one of the largest technology company public offerings in the history of the New York Stock Exchange and indicating that investors are convinced that the music streaming service business model is a lucrative one. The Company reported nearly $5 billion in revenue for 2017, according to its initial prospectus, though it posted an operating loss of $461.3 million for the year. Spotify had 71 million paying subscribers and more than 159 million monthly active listeners as of December, which places Spotify in a better position than its nearest rival, Apple Music, with just 36 million subscribers.
Presentation documents ahead of this listing stated that it could be closing in on 100 million paying subscribers by the end of the year. The direct listing is simply another springboard to get it there, keeping Spotify as the most visible of all the streaming services, and the default name that financial analysts and the media reach for.
This article was issued by Simon Psaila, Financial Analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as a personal recommendation/ investment advice including tax and legal advice. Analyst views to BUY, SELL or HOLD on particular stocks or instruments are related to the stock/instrument being reviewed and are not to be treated as personal recommendations to investors, which are only issued following suitability assessment.