Spotify on Track for Third-Largest Tech IPO Ever
Music-streaming giant opens at $165.90, valuing the company at about $29.55 billion
Spotify Technology SA SPOT +17.55% roared onto the public market Tuesday as the music-streaming giant pulled off an unusual method of going public.
The stock opened at $165.90, giving it an opening value of $29.55 billion. That would make Spotify the third-largest U.S.-listed tech IPO on record, according to Dealogic, trailing only Alibaba Group Holding Ltd. BABA -2.18% , which ended its first day of trading worth $233.89 billion, and Facebook Inc. at $81.74 billion.
The stock, which traded as high as $169 Tuesday, recently declined 4.5% from its opening price to $158.44 in high-volume trading, but it still sits well above earlier price indications and private-market trading.
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.
Pretrading indications for the stock, which now trades on the NYSE under the symbol SPOT, quickly blew past that Tuesday, starting at $145 to $155 and then rising several times, to as high as $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.
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. Listing that way saved Spotify tens of millions of dollars in fees and still gave employees and early investors the chance to cash out. But it 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 technology stocks were routed, 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, as well as 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 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 like 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 to 23% to 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.
While it is unclear when, or if, the service will make it into the black, 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.
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.
“This is a huge vindication of Spotify’s on-demand model, which has proven more popular than paid downloads ( Apple ’s original model), curated streaming (the Pandora model), and even streaming of live radio stations (the iHeart Music model)," said Mr. Verna.