Spotify Valued at $30 Billion in Stock Market Debut

Spotify's Daniel Ek - H 2014
Dorothy Hong

Spotify's Daniel Ek - H 2014

Shares of the music streaming company opened at $165.90.

Spotify Technology shares made their debut on the New York Stock Exchange on Tuesday morning, opening at $165.90 per share after taking an unusual path to their first day of trading.

The New York Stock Exchange had on Monday set a so-called reference price of $132 for Spotify's shares. After a price discovery period that lasted several hours, the stock opened at around 12:45 p.m. ET. Its significantly higher share price, up nearly 26 percent over the reference price, gave it a market capitalization of $30 billion.

Shares settled throughout the day, but still closed Tuesday up nearly 13 percent from the reference point to $149.01. At that price, Spotify is valued at over $26 billion.

The Swedish music-streaming company has made headlines over its decision to do a direct listing of its stock, meaning that it did not enlist the help of bankers for the traditional underwriting process. Until Tuesday morning, there had been little insight into how the stock would perform once Spotify completed its IPO.

Instead of raising money like most companies do during their IPOs, Spotify allowed existing shareholders to begin selling their stock to public investors. Adding to uncertainty about Spotify's IPO was the fact that there were no limitations placed on shareholders. The vast majority of Spotify shares were eligible to be sold on Tuesday, and employees are not required to adhere to a lockup period, in which they aren't allowed to sell shares. That has led to some speculation that Spotify's stock could be more volatile in its early trading days.

Spotify, which is led by CEO Daniel Ek, quietly filed for the non-traditional IPO earlier this year. The company has 157 million users worldwide with 71 million of them paying for a subscription, making it the leading music subscription service. Competitors such as Apple Music and Tidal are much smaller by comparison. But Spotify, which brought in $5 billion in revenue in 2017, is not profitable. 

"Normally, companies ring bells. Normally, companies spend their day doing interviews on the trading floor touting why their stock is a good investment. Normally, companies don't pursue a direct listing," Ek said in a blog post written the day before the IPO, in which he explained why the company had taken an unusual route to going public. "While I appreciate that this path makes sense for most, Spotify has never been a normal kind of company."

The company makes its stock market debut, under ticket symbol SPOT, during a rocky period for technology stocks. Facebook shares have fallen in the days since reports revealed that it allowed the private data of more than 50 million users to be accessed by Cambridge Analytica, a data firm with ties to President Donald Trump's 2016 campaign. Amazon shares sunk on Monday following a critical Twitter tirade by Trump. More largely, major technology companies' stocks have been under pressure amid fears about government regulation and user privacy issues. As a result, the S&P 500 and Dow Jones Industrial Average both closed down on Monday.

But despite concerns about technology industry stocks, many analysts are bullish on Spotify. In a report last month, Evercore ISI analyst Anthony DiClemente summarized his take on data that Spotify has released, writing, “User growth robust, retention improving and gross profit growth strong. Sales and marketing investment growth weigh on earnings before interest and taxes.”

He also highlighted: “Spotify is growing total users (ad-supported plus premium) faster than any company in our coverage (universe) and is showing little evidence of deceleration.” For example, in the fourth quarter, it grew monthly active users by 29 percent, compared with Facebook’s 14 percent, Snapchat’s 18 percent and Twitter’s 4 percent gains, the analyst pointed out.

Guggenheim Securities analyst Michael Morris wrote in a report after a recent Spotify investor day: "Sweden-born technology entrepreneur and CEO Daniel Ek and colleagues delivered a compelling outlook for the streaming music opportunity. Mr. Ek described the company as being in the second inning, noting that its 159 million monthly active users is on a base of 1.3 billion transaction-enabled smartphones in the 61 countries in which it operates. Management expects that smartphone count to grow to 3 billion through organic penetration growth and expansion to new markets."

He also highlighted that Ek described Spotify "as a platform to help artists live off their art, supporting the company’s approach to a 'two-sided marketplace' with tools for both musicians and fans." Added Morris: "Fans and artists come for the platform and further engage given curation and discovery. Musicians come for the audience and benefit from data transparency, informing performance decisions, and unique platform opportunities. Spotify playlists have grown to 31 percent of user listening, highlighting an increase in platform engagement in addition to passive consumption."

Morris on Tuesday formally initiated coverage on Spotify's stock with a "buy" rating and a price target of $175. "The company has a compelling value proposition — leveraging its scale and technology infrastructure to create a superior experience for consumers and content creators," he said. "As investors look for valuation parameters, we expect focus will turn to the success of a similarly positioned company, Netflix, as an indicator of potential sentiment. As such, we expect investors will largely be biased positively on Spotify shares."

The Guggenheim analyst summarized the likely investor debates about the stock this way: "It remains unclear if competitors can replicate the experience or leverage engineering and technology resources to develop a similar or superior offering. In addition, content remains Spotify’s lifeblood. The company’s ability to keep all artists and labels on the platform while controlling content costs remains a significant challenge in our view. The company must continue to grow its global subscriber base in order to increase future negotiating leverage with labels, whose legacy economics we see as most at risk from the continued shift to streaming consumption."

Concluded Morris: "We anticipate investor questions will center around the sustainability of Spotify’s competitive advantage and technological differentiators versus rivals as well as risks to content costs in future rights negotiations with artists and labels which could adversely impact the company’s ability to expand their gross margin."

Georg Szalai contributed to this report.

April 3, 6:30 p.m. Updated with Spotify's closing price.