Nobody is quite sure what to expect when Spotify stock hits the market today. Having disrupted the music industry, the streaming service is now disrupting business as usual on Wall Street with its non-IPO stock offering. As market-watchers know, Spotify is not actually listing any of its own shares today and therefore, not making a true initial public offering. It is instead undertaking a “direct listing” in which any holder of Spotify stock is free to sell it on the New York Stock Exchange for whatever price they want. Without the involvement of underwriters, the price will float freely–sinking or soaring as low or high as demand dictates.
While Spotify isn’t the first issuer to employ this approach, it is the highest profile company to do so, and the unusual approach could create a new model for tech firms going public – or it might go over as poorly as U2’s Songs of Innocence. It’s anyone’s guess – and indeed, many are chiming in on Spotify’s prospects. The late momentum has been positive, with four different analysts releasing bullish calls on the stock last week. The best insight available, though, might come from Spotify itself. In March, the company filed a 200-plus-page F1, which included a 42-page discussion of risk factors.
We dug around for knowledge beyond well-known factors like Spotify’s heavy debt load (about $3 billion) and significant losses (1.24 billion euros in 2017) and came up with five takeaways:
1) Spotify is serious about its Section 404 warning
Many companies issue so-called “Section 404 warnings” in their public filings. A reference to a section of the Sarbanes-Oxley legislation, the warnings point to “material weakness in our internal control over financial reporting,” as Spotify’s does. Spotify’s Section 404 discussion, however, is no mere boilerplate. It gets quite specific, noting that its royalty payments are a particular trouble spot, and saying: “For example, for the year ended December 31, 2015, we identified a material weakness in our internal control over financial reporting related to the accounting for rights holders’ liabilities.” That level of detail makes this warning stand out.
2) Spotify is reliant on net neutrality
If you think the end of net neutrality is well and truly here, you might want to think twice about pulling the trigger on that Spotify stock. The company puts its reliance on net neutrality right out there in its F1, stating: “Our service requires high-bandwidth data capabilities. If the costs of data usage increase or access to data networks is limited, our business may be seriously harmed . . . .” This is an intuitive point, but one that hasn’t gotten a lot of attention in the coverage of Spotify’s unique listing. Underlining the point, Spotify notes: “the adoption of any laws or regulations that adversely affect the growth, popularity or use of the internet, including laws governing internet neutrality, could decrease the demand for our service and increase our cost of doing business.”
3) Spotify is projecting confidence about competition from Apple
We wouldn’t blame any tech company for being skittish when Apple eyes its territory, as Apple is doing to Spotify with its Apple Music service. But, in contrast to its frankly stated concerns about some other issues, Spotify is puffing its chest out when it comes to Apple. Early in the F1, Spotify notes that its paid service “has nearly double the scale of our closest competitor, Apple Music.” That’s reason to boast, indeed.
4) Spotify’s costs are skyrocketing
From its launch through the end of last year, Spotify has paid almost $10 billion in royalties, and they aren’t going down. Spotify’s expenses for rights-holders rose 27 percent in 2017 over the previous year. That would raise an eyebrow under any circumstances, but complicating matters here is the fact that the royalty rates that Spotify (and its peer streaming services) is paying to musicians is the subject of significant strife in the industry.
5) Music is just the start
It’s pretty amazing what you can find in an F1. Spotify’s contains a heartfelt letter from CEO Daniel Elk that lays out a grand vision for the company. “Music has just been the beginning,” Ek says. “And we have even bigger aspirations. We envision a cultural platform where professional creators can break free of their medium’s constraints and where everyone can enjoy an immersive artistic experience that enables us to empathize with each other and to feel part of a greater whole.”
We won’t attempt to translate that into English, but it certainly sounds bold. And if music is, in fact, just the start of Spotify’s business, then it will be a smart buy today at almost any price.
From Intelligize: Spotify F1