I admit it… I’m one of those people who sings too loud (and a little off key) when I’m wearing headphones. Especially if Journey’s “Don’t Stop Believin'” plays.
I can’t help it, music moves me…much to the chagrin of anyone within listening range.
In fact, most of my iPhone memory is dedicated to my playlists. Before I recently upgraded my storage, I had to delete photos to keep all that music ready to play at the touch of a finger.
Now, I have a lot of space… but there is a problem.
I have been known to shell out over $20 a month to buy songs from Apple. I know, that’s completely unnecessary with today’s streaming technology. But I was stuck in my ways.
Recently, I “unhooked”… and joined the popular Swedish-based direct listening service, Spotify. And I will never back down.
So when Spotify, valued at around $20 billion, announced its IPO with a March/April stock offering in a unique way, I perked up. I started checking the headlines, and analysts are already calling this the biggest tech IPO of 2018. The anticipation is huge!
But alas, I am a cynic at heart. Despite my enthusiasm, I had to ask myself… is Spotify stock really worth the hype? So today, let’s take a detailed look at this initial public offering to find out.
Speaking of a musical revolution
In my opinion, Spotify is part of the most important innovation in music since perhaps Kurt Cobain discovered ear-splitting commentary and raw, dizzying lyrics about teen angst.
The concept is simple: stream music on the Internet. Free. Or, at most, a small monthly fee of $9.99. You just need the Spotify app to access everything.
When Spotify launched in October 2008, it was a disruptive and 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 much later in 2015).
Spotify is an endless and easy to use treasure chest.
You listen to what you want, where you want, when you want. The app is compatible with pretty much every device I can think of, from computers to smartphones to tablets.
And if all that music sounds overwhelming, don’t worry, you can also use its unique music discovery feature to find songs that fit your musical tastes.
The whole platform is a great idea.
Unfortunately, investors like us were unable to participate in this revolutionary service because the company was private for the last decade. So now that we can get into the stock soon, we need to make sure it’s worth the investment.
The Times, they’re trading for a $1.8 trillion industry
The first thing to note is that according to PwC, the global entertainment industry is expected to grow from $1.8 trillion in 2016 to $2.2 trillion in 2021. That’s fine, but it represents a rate. compound annual growth of 4.2%, below the 4.4% forecast made in 2016.
That means the old-school entertainment industry is starting to stall. To fix that, the industry must focus on building sustainable customer relationships.
After all, consumers are king. When it comes to recordings (movies, TV, music), we can dictate 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 health care, cars, refrigerators, thermostats, etc. needed a revolution (see precision medicine and the Internet of Things), so did entertainment.
And that revolution is here. Spotify is just one of the big players.
That’s why Spotify has around 140 million active listeners, and 70 million of them pay premium rates for advanced features. Better yet, the service boasts 30 million songs and adds more than 20,000 a day.
It also boasts over 2 billion playlists, generated by the company’s growing user base (a great idea that engages the customer much more directly), with a further 5 million playlists being created or edited daily.
This is obviously a huge scope. However, there is a problem…
The problem: money, money, money
Despite all this, Spotify has not found a way to be profitable.
Yes, sales were up 52% to $3.09 billion in 2016. But the net loss more than doubled to $568 million. (Although the adjusted net loss is more like $310 million.)
For example, approximately $2.62 billion of that revenue was wiped out with cost of goods sold. Another $440 million disappeared in sales and marketing expenses, etc.
At least earnings before interest, taxes, depreciation and amortization were negative $169.2 million in 2016, compared to a loss of $180 million the prior year. Billboard calculated.
But we need the company to generate positive income.
Spotify is not. So the numbers made me raise an eyebrow. With that in mind, I turned to Paul Mampilly for his thoughts on Spotify’s public listing.
Paul Mampilly talks about Spotify stock
Paul is our go-to guy for all things disruptive technology, so I knew he had some interesting ideas on this. This is what he told me:
Spotify’s public listing is interesting from two angles: First, it’s a non-traditional IPO because it excluded Wall Street from the pricing. Instead of making the shares available to the general public, Spotify will be listed directly on the stock exchange. That means only institutional investors have access, eliminating the need for banks to set an initial price, link sellers and buyers, etc. This is something that makes the initial trade a wild card because Wall Street’s involvement offers price stabilization for IPOs.
Second, Spotify is still losing money, even though it has a large subscriber base. However, it’s also a subscription business, which means repeat revenue, and that’s a great model. Also, like Netflix, it’s a global business, so it can continue to grow.
So the biggest concern for Spotify is this: Are enough people going to buy into the IPO that you want to be in it from day 1? Because most of the time you have the opportunity to buy it lower. This is because most people play IPOs to get a quick hit the first day or week, and then get rid of them.
I say that people who want to buy the stock as an investment should bide their time, wait to see how the stock trades and see how Spotify’s business performs over a few quarters. You can then build your position over time, if things look good.
All in all, Spotify is an amazing product with a great model. Ultimately, that can lead to future profitability. But this is a “wait and see”. Don’t get caught up in all the hype just yet!
