There you have it, folks: Spotify (NYSE:SPOT) officially opened at $165.90 this afternoon in its wildly anticipated public debut. The NYSE had set a "reference price" of $132 in the morning, serving as a sort of guideline for investors that were lining up to place orders. The reference price is not the same thing as the offering price in a traditional IPO and has no other bearing to the direct listing since Spotify is not selling any shares itself and not raising any capital.
Since there were no investment banks crunching valuation numbers or setting a price, the reference price is really just a recommended starting point that is based in part on recent trading activity in the private market. Spotify shares had traded as high as $131.88 in the first half of March.
Shares are already fetching a premium valuation
At that opening price, which was driven by strong investor demand for Spotify shares, the Swedish company is valued at $29.5 billion. Spotify had generated revenue of 4.1 billion euros ($5 billion) in 2017 and recently provided guidance for the first quarter for revenue in the range of 1.1 billion euros to 1.15 billion euros ($1.35 billion to $1.4 billion), which includes a hit of 95 million euros to 105 million euros due to foreign exchange headwinds.
That puts trailing-12-month revenue in the ballpark of 4.3 billion euros ($5.3 billion), meaning that shares opened at a valuation of about 5.6 times sales. That valuation prices in optimistic expectations for Spotify's future, even as Spotify has long been unprofitable thanks to hefty royalty costs paid to record labels.
Still, there are other ways to justify that premium valuation. The company is the largest music-streaming platform on Earth by a wide margin, enjoys ubiquity thanks to expansive third-party partnerships and integrations, and harnesses all that user data to fine-tune its market-leading discovery algorithms. Spotify also addresses large swaths of the market that Apple is simply uninterested in: Android users and users in emerging markets that can't afford to pay $10 per month. (Apple Music is technically available on Android, but the service is designed for users entrenched in the Mac maker's ecosystem.)
Generally speaking, IPOs are extremely volatile when trading commences. Spotify's direct listing may be even more volatile due to the nature and mechanics of direct listings, which few investors have experience with. Additionally, there will not be any lock-up agreements associated with the direct listing, which is customary for traditional IPOs.
In a regular IPO, there are a specified number of shares that we know will be offered by both the company and existing shareholders. In a direct listing, existing shareholders register a certain number of shares that they can sell but are under no obligation to sell. Spotify registered 55.7 million shares in the direct listing that can be sold, but existing shareholders "may, or may not, elect to sell their ordinary shares covered by this prospectus, as and to the extent they may determine."
Among other reasons, Spotify had said that "market-driven price discovery" (which is how all secondary markets work) was one of the reasons it was pursuing a direct listing instead of a traditional IPO, although the real reason was likely Spotify trying to effectively negate some onerous terms associated with convertible debt that has since been exchanged for equity. Let the price discovery begin!