If you're bullish on streaming music, you may soon get a chance to buy stock in one of the world's largest streaming music services. Spotify has over 60 million paying subscribers and 140 million active users, easily trouncing Pandora Media (NYSE:P), Apple (NASDAQ:AAPL), and Amazon's (NASDAQ:AMZN) music services. But there's one music service that's much bigger. Fortunately, it plans to collaborate with Spotify (more on that below). Will going public help Spotify take on growing competition?
Spotify AB, a Swedish company, is "expected to receive approval from the Securities and Exchange Commission to move forward with a listing of its shares on the New York Stock Exchange," reported The Wall Street Journal Thursday.
Here's what investors should know.
In a move to avoid the high investment banking fees typically associated with initial public offerings, Spotify is attempting to avoid investment bankers altogether. The company has asked the NYSE to go public as a direct listing, or a listing in which it does not offer new shares. While the NYSE will first have to secure approval from the Securities and Exchange Commission (SEC) before it can allow Spotify to go public as a direct listing, "people familiar with the situation" told the WSJ that the SEC is likely to approve the method.
A planned IPO comes shortly after Spotify announced an equity swap with Chinese internet company Tencent Holdings -- a tech giant with a market capitalization close to $500 billion. On Dec. 8, Spotify and Tencent (and Tencent subsidiary Tencent Music Entertainment Group) jointly announced equity investments in each other, "strengthening relationships between the two most popular music streaming platforms in the world."
As part of the deal, Spotify and Tencent Music Entertainment Group (TME) paid cash to acquire minority stakes in each other. Tencent and TME also said they would invest in Spotify through secondary purchases. "Following these transactions, Spotify will hold a minority stake in TME, and both Tencent and TME will hold minority stakes in Spotify," explained the joint press release.
The two companies said the dual investments signify their intentions to collaborate on opportunities in the digital music space.
Giving some insight into how Spotify's potential IPO may be priced, Spotify was valued at close to $20 billion when Tencent and TME invested in the streaming music company, the WSJ reported. This is up significantly from a valuation of under $9 billion in 2015 during a private capital raise.
Spotify is reportedly aiming for an initial public offering (IPO) time frame of March or April.
Spotify's IPO would take place amid heightened competition in the streaming music space.
Pandora has over 5 million paying subscribers, up 29% year over year. Furthermore, it has 73.7 million active listeners and reaches more Americans than any other music service.
Apple Music hit 30 million paying subscribers in September, 10 million more than it had in December of last year.
And then, of course, there's Tencent's music service. Though its subscribers are mostly concentrated in China, TME boasts 120 million people who pay to stream or buy music and 700 million monthly active users.
While Spotify's 60 million paying subscribers and 140 million active users -- all outside of China -- give it a dominant position in many key markets, the company will have far less cash available to invest in its business than some of its peers. Apple Music, Amazon Music Unlimited, and TME are all backed by parent companies with more capital available to them than their music services could ever need. So if Spotify goes public, the company will need to prove to investors that it can win with shrewd execution and strategy.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Daniel Sparks owns shares of Apple. The Motley Fool owns shares of and recommends Amazon, Apple, and Pandora Media. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.