Say Hello to Spotify

After years of speculation, music-streaming giant Spotify (SPOT 11.48%) is finally trading on the public markets.

In this episode of Industry Focus: Tech, analyst Dylan Lewis and Motley Fool contributor Evan Niu take a look at how the stock did on its opening day, a few of the differences between an initial public offering and a direct public offering, what investors should know about the company's reference price and float, how the stock will probably fare in the next few months, and more.

A full transcript follows the video.

This video was recorded on April 6, 2018.

Dylan Lewis: Evan, the reason we're talking about Spotify today is, shares hit the market earlier this week, and frankly, Wall Street seemed pretty excited.

Evan Niu: Yeah, it was a pretty big day. Shares opened at around $165, kind of went up a little bit from there, I think close to $169-170, but have been falling. Ended the day much lower. Investors are still trying to figure out what this thing is worth.

Lewis: But, they ended lower, and yet still above this reference price that we saw, which is kind of a testament to the idea that -- this is something that I have to put in quotes, this "reference price" is something that we're not super familiar with, and a testament to the odd approach with the direct listing that we saw here. Maybe something people aren't as familiar with. Why don't we talk a little bit about what price discovery is, what the reference price was, all of these terms that came up in the coverage of this issuance that people may not normally be seeing?

Niu: Sure. In a traditional IPO, there's an offering price that comes out, and that's the official price at which the shares are sold through the offering to investors. But in this case, since it wasn't a traditional IPO, it was a direct listing, what they did is, the New York Stock Exchange put out a quote-unquote "reference price," like you mentioned. That was $132, which is basically the high at which it traded at in the first half of March. So, again, it's pretty self-explanatory, it's like, "Hey, for reference, this is what these shares were." It's not an offering price. The opening price was still primarily determined by supply and demand dynamics.

It's also worth noting that the float that were actually sold was actually quite small. There are about 55 million shares that are registered in the offering, but those are just existing shareholders that have registered the shares, so they're able to sell the shares. But it's still entirely up to their discretion on what they do or don't want to sell. And in this case, it seems like, I was looking at the number yesterday, it was about five or six million shares that ended up being sold into the open market on the first day trading, which is only about 3% of total shares outstanding. So, the float was very small on the first day.

Lewis: And that's something that you have to keep in mind with IPOs, or direct listings, in this case -- when shares become available for the first time, a very small portion of the overall shares are available. And so, if there's any demand whatsoever, that's going to cause some craziness in share price.

Looking at the market's reaction, I think there's probably a sigh of relief here for Spotify, because this was not exactly the warmest water to be jumping into for a tech issuance. There are so many big macro things that are causing uncertainty in the stock market right now. And then you look specifically at the tech sector, you've got like Amazon being in Trump's crosshairs, you have all the data issues with Facebook, you have some self-driving car problems. The world does not love the tech space right now. So, I think anyone that owns Spotify shares or has been following this story is kind of relieved to see that there wasn't this massive sell-off.

Niu: Right, I mean, and the shares have been coming down since then. But I would certainly expect this to continue being quite volatile, just because the whole process was kind of unique, plus the whole short float thing, and all companies are very volatile when they go public, so I would expect it to continue being really volatile.