Spotify Roars Into the Public Market

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 shareholders.

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 “very smooth.”

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.