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The Largest Tech IPO of 2018 Is Overhyped
I’ll admit it… I’m one of those people who sings too loudly (and a little out of tune) with headphones on. Especially when Journey’s “Don’t Stop Believin'” came out.
I can’t help it, the music makes me… much to the chagrin of anyone within listening range.
In fact, most of my iPhone’s memory is used for my playlists. Before upgrading my storage recently, I actually had to delete photos in order to have all the music playing at the touch of my finger.
Now, I have enough space…but there is a problem.
I’ve been known to spend upwards of $20 a month on songs from Apple. I know that’s completely unnecessary with today’s streaming technology. But I’m stuck in my way.
So recently, I “freed myself”… I joined the popular Swedish-born direct-listening service Spotify. I will never look back.
So when Spotify, worth around $20 billion, announced a March/April IPO in a unique fashion, I took heart. I started combing through the headlines, which analysts are already calling the biggest tech IPO of 2018. The anticipation is huge!
But alas, I’m a cynic at heart. As excited as I am, I have to ask myself…is the hype over Spotify stock really worth it? So today, let us take a detailed look at this IPO and find out.
talk about a musical revolution
In my opinion, Spotify is one of the most important innovations in music, perhaps because Kurt Cobain found deafening feedback and raw, sickening lyrics about teenage angst.
The concept is simple: you play music on the Internet. free. Or, pay a small fee of up to $9.99 per month. All you need is the Spotify app to access everything.
When Spotify launched in October 2008, it was a groundbreaking, revolutionary idea. That’s why the company helped pioneer the music streaming market, paving the way for services like Apple Music (Apple’s streaming service, which launched later in 2015).
Spotify is an endless, user-friendly treasure trove.
You can listen to whatever you want, anytime and anywhere. The app is compatible with just about every device I can think of, from computers to smartphones to tablets.
Don’t worry if all that music sounds overwhelming – you can also use its unique music discovery feature to find songs that suit your musical tastes.
The whole platform is a grand idea.
Unfortunately, investors like us were unable to participate in this revolutionary service as the company has been privately held for the past decade. So now that we can get involved in a stock very quickly, we need to make sure it’s worth the investment.
era, they are transforming a $1.8 trillion industry
The first thing to note is that the global entertainment industry is expected to grow from $1.8 trillion in 2016 to $2.2 trillion in 2021, according to PwC. That’s fine, but it represents a compound annual growth rate of 4.2% – lower than the 4.4% forecast percentage made in 2016.
That means the old-school entertainment industry is starting to level off. To combat this, the industry needs to focus on building sustainable relationships with customers.
After all, the consumer is king. When it comes to recordings – film, TV, music – we get to decide what we want to see, hear and experience. We vote with our time, our attention, and a small subscription fee (think Netflix, Amazon Video, and Hulu).
Just as industries and products like healthcare, cars, refrigerators, thermostats, etc. need a revolution – see precision medicine and the Internet of Things – so does entertainment.
The revolution is here. Spotify is just one of the big players.
That’s why Spotify has about 140 million active listeners, 70 million of whom pay extra for premium features. Even better, the service has 30 million songs and is adding more than 20,000 every day.
It also has more than 2 billion playlists generated by the company’s growing user base (a great idea to reach customers more directly), with another 5 million playlists being created or edited every day.
That’s obviously a huge impact. However, there is a problem…
Question: money, money, money
Still, Spotify hasn’t figured out how to make money.
Yes, sales jumped 52% to $3.09 billion in 2016. But the net loss more than doubled to $568 million. (Although the adjusted net loss was closer to $310 million.)
For example, about $2.62 billion in revenue evaporated along with cost of sales. Another $440 million was spent on sales and marketing expenses, among other things.
At least, earnings before interest, taxes, depreciation and amortization were negative $169.2 million in 2016, compared with a loss of $180 million the year before, billboard calculate.
But we need to see the company generate positive revenue.
Spotify is not. So those numbers make me raise my eyebrows. With that in mind, I turned to Paul Mampilly for his take on Spotify going public.
Paul Mampilly on Spotify Stock
Paul is our go-to guy for all disruptive technologies, so I knew he must have some interesting ideas about it. Here’s what he told me:
Spotify’s public listing is interesting from two perspectives: First, it’s an unconventional IPO because it removes Wall Street from pricing. Spotify will list directly on a stock exchange, rather than offering shares to the public. This means only institutional investors can get in – eliminating the need for banks to set initial prices, contact sellers and buyers, etc. That makes the initial deal an unknown, as Wall Street participation provides price stability for the IPO.
Second, despite Spotify’s massive user base, it’s still losing money. However, it’s also a subscription business, which means recurring revenue — a great model. Plus, like Netflix, it’s a global business, so it can continue to grow.
So, Spotify’s biggest concern: Will enough people buy into the IPO that you’ll want to be a part of it from day one? Because most of the time you have the opportunity to buy at a lower price. That’s because most people play the IPO on the first day or week for a quick pump and then sell off.
I say those looking to buy the stock as an investment should bide their time and wait to see how the stock trades — to see how Spotify’s business performs over a few quarters. Then, if things look good, you can build up your position over time.
All in all, Spotify is a great product with a great model. This could end up being profitable in the future. But this is a “wait and see” process. Don’t get caught up in all the hype!
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