Spotify Technology SA roared
onto the public market Tuesday as the music-streaming giant pulled off an
unusual method of going public.
The stock, at 4 p.m. ET on April
3, 2018, was at $149.01, giving the music-streaming company a market value of
$26.5 billion. At that level, Spotify would be among the top-ten biggest tech
IPOs at the end of the first day of trading, behind Google’s debut in 2004,
according to Dealogic.
The stock opened at $165.90 but
slid as much as $17.64 as the day wore on. Still, it sits well above early
price indications and private-market trading, marking a win for its
Because of its nontraditional IPO
route, shares of the Swedish company didn’t get an official IPO price—rather,
the New York Stock Exchange published a so-called reference price of $132 for
them Monday night.
Pre-trading indications for the
stock, which now trades on the NYSE under the symbol SPOT, quickly blew past
that on Tuesday, starting at a range of $145 to $155 and then rising several
times, to highs of $167 to $170. In private-market trading, the shares had been
on the rise, recently jumping as high as $137.50, according to people familiar
with the trades.
With the share price hovering
around $152, the stakes owned by Spotify’s top executives have become much more
valuable: Chief Executive Daniel Ek’s 8.8% stake is worth $2.37 billion, and
co-founder Martin Lorentzon’s 12.2% stake is worth roughly $3.30 billion.
Sony Music Entertainment, the
world’s second-largest record company, which has agreed to share the proceeds
of any stock sale with artists, has a 5.7% stake now worth $1.55 billion. And
Chinese internet giant Tencent Holdings Ltd., which swapped some
equity with Spotify in December, now has a 9.1% stake valued at $2.46 billion.
To flip itself public, Spotify executed
a rare move called a direct listing, eschewing investment-banking underwriters
and opting not to raise any money for itself. Spotify saved tens of millions of
dollars in fees and still gave employees and early investors the chance to cash
out. But such a move also means that investors don’t have the customary
protections of a typical IPO and that trading of the company’s stock,
especially early on, could be turbulent as the market finds a price.
To compound matters, Spotify made
its debut as perhaps the most notable tech IPO in years a day after a selloff
in technology stocks, leading broader markets sharply lower. Investors have
been dumping tech stocks as some of the biggest names in the sector face
scrutiny from lawmakers and regulators, and a backlash from consumers.
“Spotify will be lumped in with
other tech stocks, which have been battered lately because of Facebook ’s data-privacy
issues,” said eMarketer analyst Paul Verna. “One could argue that this is
unfair to Spotify, but they’re going to have to get used to market volatility
and getting dragged down (or pushed up) by other companies in their general space.”
The unusual approach to the IPO
also meant Spotify took longer to open on its first day than any other company
in recent memory, topping Alibaba, believed to be the previous record-holder.
In 2014, Alibaba didn’t begin trading until 11:53 a.m., more than two hours
after the opening bell. Spotify opened at 12:43 p.m.
The morning began with a mix-up
that the exchange took in stride: A Swiss flag—rather than a Swedish one—was
hoisted for a few minutes outside the NYSE underneath a huge Spotify banner. The
exchange said in a statement that “it was a momentary ode to our neutrality in
the process of price discovery.”
Spotify’s successful offering
could entice other tech companies currently sitting on the sidelines to go
public. It could also generate heightened interest in direct listings, which
before Tuesday had never been done by a company of this size to go public.
The NYSE received a number of
inquiries from companies about the direct-listing process in the run-up to
Spotify’s debut, NYSE Group President Tom Farley said.
“Now that the dust is settled,
I’m looking forward to going back to those companies and finding out where
their heads are at,” he said in an interview on the NYSE’s floor on Tuesday,
soon after Spotify shares began trading.
He described Spotify’s debut as
Now public, Spotify stands to
face scrutiny from Wall Street as it tries to become profitable in an
increasingly competitive music-streaming landscape. Many rivals including Apple
Inc., Alphabet Inc.’s Google and Amazon.com Inc., as
well as veterans such as Pandora Media Inc., are offering
similar on-demand streaming services now.
Spotify has made it clear it is
prioritizing growth over profit and is betting that strategy will make its
business more valuable in the long run.
Asked Tuesday before trading
about a report in The Wall Street Journal that Apple Music is on
track to pass Spotify’s subscriber count in the U.S.—the largest music
market—this summer, Mr. Ek told CBS the rivalry is healthy.
“What we’ve found is, when we’ve
got competition, it grows the market,” he said.
Spotify issued its first guidance
to potential investors last week, indicating it expects sharp but slowing
growth. Spotify remains the global leader in music streaming, with 157 million
active users, including 71 million who pay. Subscriptions have been the most
closely watched metric as services such as Spotify grow. The company
anticipates subscribers—who generate much more revenue than users of the
company’s ad-supported free tier—to grow 36% this year. A monthly subscription
is $9.99; a family subscription offers up to six accounts for $14.99; and a
student plan, bundled with a Hulu subscription, is $4.99.
Investors also are closely
tracking the company’s gross margins, which are forecast to expand between 23%
and 25% from 21% last year. Because Spotify’s costs—mostly the royalties it
pays to record companies to stream their music—follow its growth, turning a
profit is a tough proposition.
Spotify is largely responsible
for reversing a tide of declining revenue in the record industry amid rampant
piracy and plummeting CD sales. Last year, revenue rose to its highest level in
a decade, with paid subscriptions being the largest contributor to growth.
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