Most IPOs come with bells and whistles.
There’s a roadshow for investors. Underwriters and intermediaries are there to stabilize the share price.
Company executives even get to ring the bell at the NYSE open.
But Spotify (SPOT), the music-streaming leader, didn’t want any of that. Instead it opted for a direct listing, which allows current shareholders to sell shares directly to the public without the assistance of an underwriter or any other intermediary.
One of the key reasons for doing so is the company doesn’t have to pay underwriters’ huge fees as high as 15 to 20%. There are no new shares issued – instead shares are offered by existing shareholders, so there is no shareholder dilution.
Usually, a company launches an IPO because it wants to raise cash. By issuing shares, the company can draw money from investors rather than having to go to a bank.
A direct listing, however, does not seek to raise money. It’s a way to set a value on the company.
SPOT will issue no new shares and will not raise a penny. Instead, it will simply allow existing investors an opportunity to sell their shares on a regulated market. In short, a direct listing is not a way to finance a company’s growth, instead it gives shareholders a way out of their investment, should they choose to do so. In essence new investors are buying shares from existing shareholders, who want to get out of the stock. That doesn’t give us a feeling of confidence.
On April 3, the first day of trading, SPOT had a “reference price” of $132 a share. Since there are no investment banks that set an IPO price in a direct offering, a reference price is just a recommended starting point.
The stock hit the ground running, opening on the NYSE at $165.90. It shot to a high of $169 in the first 10 minutes, giving it a valuation of $26.5 billion. That made it the eighth largest public offering for a tech company right behind Google in 2004, which was valued at $27.2 billion. However, shares eventually slid to close at $149.01 that day.
Granted, SPOT is not profitable, having lost more than $3 billion since it launched 10 years ago, but it has still amassed 71 million paid subscribers (a 46% increase in 2017) and has a goal of 96 million by the end of 2018. Plus, revenue has increased 39% year over year to about $5 billion, according to the company’s filings. It has a $1.5 billion loss for 2017.
The only real challenge – other than profitability – is that Apple, Google, and Amazon could take a bite out of its lunch.
Still, “we think Spotify's market leadership, emerging markets exposure, favorable user demographics, the secular shift to mobile and digital services, as well as the near-universal appreciation of music, will support Spotify's growth for years to come," noted analysts at Stifel, who have a buy rating with a $180 price target, as quoted by NASDAQ.
Stay tuned to The Cheap Investor for more on this interesting development.