Please ensure Javascript is enabled for purposes of website accessibility

Mark Your Calendar: Spotify Will Start Trading on April 3

By Evan Niu, CFA – Mar 16, 2018 at 1:03PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The largest music-streaming service goes public in less than three weeks.

Music-streaming leader Spotify hosted its first ever investor day this week ahead of going public. The company needs to make its debut before July 2 to free itself from some convertible debt that carried rather burdensome terms, which has been an overhang for Spotify for nearly two years. All of that debt has now been converted to equity, but the majority of it would revert if Spotify misses the deadline.

Well, Spotify confirmed during the event that it will make it with plenty of time to spare. Shares will start trading on April 3, less than three weeks from now. Here are three other important takeaways for prospective investors from the presentation.

Spotify interface shown on a desktop

Image source: Spotify.

Guidance is coming

There's another important date to mark on your calendar: March 26. That's the day on which Spotify will release its first-quarter earnings results and provide investors with guidance for 2018.

For reference, the company generated 4.1 billion euros ($5 billion) in revenue last year and posted a net loss of 1.2 billion euros ($1.5 billion), and ended 2017 with 71 million premium subscribers. These are the headline metrics to compare against once Spotify releases its forecast.

The free tier is here to stay

Generally speaking, the music industry loathes free, ad-supported services, in part because it affects consumers' value perception of music. Why pay for something when you can get it for free (with ads)? Artists have also long complained that free services don't pay them meaningful royalties for their work. (You may recall the 2014 spat between Taylor Swift and Spotify over royalty rates.) This is partially why Apple is the industry's champion, as Apple Music does not include a free tier.

Product chief Gustav Sodorstrom confirmed that offering a free tier is core to Spotify's model, pointing to three key reasons why it's here to stay. First, it brings in millions of listeners that are "on the fence" about paying. Second, Spotify can collect data from all those users, which is subsequently fed into its discovery algorithms; content discovery is one of Spotify's strongest competitive advantages. Finally, many of those users end up converting to premium subscribers after experiencing the service.

In its F-1 filing, the company had said that 60% of gross premium subscriber additions since early 2014 have come from the free tier.

Other reasons for a direct listing

Spotify's decision to pursue a direct listing instead of a traditional IPO has left many investors scratching their heads. The company provided five key reasons it was taking such a rare route to go public.

  1. List without selling shares
  2. Liquidity for shareholders
  3. Equal access to all buyers and sellers
  4. Radical transparency
  5. Market-driven price discovery

Regarding No. 1 and No. 2, Spotify is not selling any shares in the listing, and as such will not receive any of the proceeds. All shares being sold will come from existing shareholders (private investors, insiders, and employees). Additionally, Spotify says it has enough money, with over 1.5 billion euros ($1.8 billion) in cash on the balance sheet at the end of 2017, no debt, and positive free cash flow. There's no need to dilute shareholders.

No. 3 refers to the fact that traditional IPOs often give preferential treatment to institutional investors that tend to get allocated more shares, oftentimes those with close relationships with the underwriters. There is no underwriting syndicate at all in a direct listing. This will create a "level playing field," Spotify argues. Sellers will also not be subjected to lock-up periods that are standard for IPOs.

"Radical" might be an exaggeration for No. 4. Spotify has filed its F-1, but any company going public has to disclose all sorts of details regarding its business. The only real difference is that Spotify live-streamed its investor day publicly online, instead of conducting a private roadshow targeting institutional investors, which is what happens in traditional IPOs.

No. 5 cuts both ways. With no investment bankers setting an offering price, the market will be left to its own devices to figure out what Spotify should be worth. The company says it believes that the "wisdom of crowds trumps expert intervention." But lacking that "expert intervention," prices could be extremely volatile at first (as if volatility risk wasn't great enough for regular IPOs).

What Spotify did not mention was that a direct listing helps Spotify bypass some of the most onerous terms of the aforementioned convertible debt, which were mostly tied to an IPO occurring.

Evan Niu, CFA owns shares of AAPL. The Motley Fool owns shares of and recommends AAPL. The Motley Fool has the following options: long January 2020 $150 calls on AAPL and short January 2020 $155 calls on AAPL. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/28/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.