The largest technology IPO of 2018 is overvalued

I admit it … I’m one of those people who sings a little too loud (and a little out of tune) when I have headphones on. Especially if Journey’s “Don’t Stop Believin ‘” is playing.

I can’t help it, the music moves me … much to the chagrin of anyone in listening range.

In fact, most of my iPhone’s memory is dedicated to my playlists. Before updating my storage recently, I had to delete photos to keep all that music ready to play with the touch of my finger.

Now I have a lot of space … but there is a problem.

I’ve been known for shelling out over $ 20 a month to buy Apple songs. I know, that’s completely unnecessary with today’s streaming technology. But I was caught in my ways.

Recently, I “took off” … and joined the popular Swedish-born direct listening service Spotify. And I will never turn back.

So when Spotify, valued at around $ 20 billion, announced that it would go public with a stock offering in March / April in a unique way, I was encouraged. I started checking the headlines, and analysts are already calling this the largest technology initial public offering (IPO) of 2018. The anticipation is huge!

But, alas, I am a cynic at heart. Despite my enthusiasm, I had to wonder … is the enthusiasm for Spotify’s stock really worth it? So today, let’s take a detailed look at this IPO to find out.

Talking about a musical revolution

In my opinion, Spotify is part of the biggest innovation in music since perhaps Kurt Cobain discovered deafening comments and raw, dizzying lyrics about teenage angst.

The concept is simple: stream music on the internet. Free. However, at most, a small monthly fee of $ 9.99. You only need the Spotify app to access everything.

When Spotify launched in October 2008, this was a revolutionary and disruptive idea. That’s why the company helped pioneer the music streaming market, paving the way for services like Apple Music (Apple’s streaming service, which launched much later in 2015).

Spotify is an endless and easy to use treasure chest.

You listen to what you want, where you want, when you want. The app is compatible with pretty much every device I can think of, from computers to smartphones and tablets.

And if all that music sounds overwhelming, don’t worry, you can also use its unique music discovery feature to find songs that suit your musical tastes.

The whole platform is a great idea.

Unfortunately, investors like us were not able to participate in this revolutionary service because the company was a private company for the last decade. So now that we will be able to participate in the stocks soon, we need to make sure it is worth the investment.

The Times, they’re changing for a $ 1.8 trillion industry

The first thing to note is that according to PwC, the global entertainment industry is expected to grow from $ 1.8 trillion in 2016 to $ 2.2 trillion in 2021. That’s good, but it represents a compound annual growth rate of 4.2. %, below the 4.4% forecast made in 2016.

That means the old-school entertainment industry is starting to stagnate. To fix this, the industry must focus on building sustainable customer relationships.

After all, consumers are king. When it comes to recordings (film, television, music), we can dictate what we want to see, hear, and experience. We vote with our time, our attention, and a small subscription fee (think Netflix, Amazon Video, and Hulu).

Just as industries and products such as healthcare, automobiles, refrigerators, thermostats, etc., needed a revolution (see precision medicine and the Internet of Things), so too was entertainment.

And that revolution is here. Spotify is just one of the big players.

That’s why Spotify has around 140 million active listeners, and 70 million of them pay premium fees for advanced features. Better yet, the service has 30 million songs and adds more than 20,000 per day.

It also features over 2 billion playlists, generated by the company’s growing user base (a great idea that engages the customer much more directly), and an additional 5 million playlists are created or edited daily. .

Obviously, this is a huge scope. However, there is a problem …

The problem: money, money, money

Despite all this, Spotify has not found a way to be profitable.

Yes, sales increased 52% to $ 3.09 billion in 2016. But the net loss more than doubled, reaching $ 568 million. (Although the adjusted net loss is more like $ 310 million).

For example, approximately $ 2.62 billion of that revenue evaporated with cost of goods sold. Another $ 440 million disappeared in selling and marketing expenses, etc.

At least earnings before interest, taxes, depreciation and amortization were negative $ 169.2 million in 2016, compared to the loss of $ 180 million the previous year. Billboard calculated.

But we need the company to generate positive income.

Spotify is not. So the numbers made me raise an eyebrow. With that in mind, I turned to Paul Mampilly for his take on Spotify’s public listing.

Paul Mampilly talks about Spotify stocks

Paul is our go-to man for all things disruptive technology, so I knew he had to have some cool ideas on this. This is what he told me:

Spotify’s public listing is interesting from two angles: First, it’s a non-traditional IPO because it removed Wall Street from pricing. Instead of making the shares available to the general public, Spotify will be listed directly on the stock exchange. That means only institutional investors have access, eliminating the need for banks to set a starting price, link sellers and buyers, etc. This is something that makes the initial trade a wild card because Wall Street participation offers price stabilization for IPOs.

Second, Spotify continues to lose money, even though it has a huge subscriber base. However, it is also a subscription business, which means that revenue is repeated, and that is a great model. Also, like Netflix, it is a global business, so it can continue to grow.

So the biggest concern for Spotify is this: Are there enough people who will buy the IPO that you want to be in it from day one? Because most of the time you have the opportunity to buy it lower. This is because most people play IPOs to get a quick pop on the first day or week, and then quit.

I say that people who want to buy stocks as an investment should bide their time, wait to see how the stocks trade, and see how Spotify’s business performs in a few quarters. So you can build your position over time, if things look good.

All in all, Spotify is an amazing product with a great model. That can ultimately lead to profitability down the road. But this is a “wait and see”. Don’t get caught up in all the hype just yet!

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