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Investing in Spotify: What to consider
One of the first, and most popular, music streaming apps, Spotify has made a name for itself as one of the hottest tech companies in Europe. Founded in 2006 and releasing its first app in 2008, Spotify has tens of millions of subscribers around the world, rivalling well-known tech giants, such as Apple, Alphabet (Google) and Amazon. The Swedish giant went public in 2018 under the ticker symbol SPOT, in a process known as a direct listing, which is different than a traditional Initial Public Offering (IPO). Instead of raising money when going public, by issuing new shares and enabling early investors to purchase them before they are available on the stock market, Spotify made its existing investors’ shares tradable from the very beginning, issuing no new shares and raising no extra capital. The company was valued at some $23 billion when it initially went public.
Who should include SPOT in their portfolios?
- Tech investors: Making a name for itself as one of the prominent tech companies in Europe, those who base some of their portfolios on this market segment could buy SPOT stocks.
- Music streaming enthusiasts: Spotify is a pioneer when it comes to music streaming and is constantly dealing with growth in demand and rival company’s services. Investors who believe the industry still has room to grow should consider investing in SPOT since it is a leader in the industry.
- Long-term investors: Going public more recently than other similarly valued tech companies on the market, the Spotify chart will most likely show some volatility over time. Therefore, those who believe in the company’s future success could invest in Spotify as part of a long-term strategy.
- Day traders: Like many tech companies, Spotify is also exposed to market factors that could generate short-term volatility. Day traders could try to take advantage of movements in SPOT prices, in an attempt to turn a profit over the course of a single day.
What drives Spotify’s price?
Spotify’s public listing on the NYSE was an important market event in 2018, raising a lot of interest in the financial and tech spheres. Like all other publicly traded companies, the SPOT chart could be affected by various factors, both relating to its direct market and broader economic happenings. Operating out of Europe, Spotify prices can also sometimes move in different directions than its US-based counterparts. Here are some of the factors that can affect it:
- Competition: Spotify’s music streaming service is in direct competition with some of the biggest names in tech, such as Apple (Apple Music), Google (Google Play Music) and Amazon (Amazon Prime Music). Therefore, its price could both be affected when its competitors are on the rise due to general positive trends in the streaming music industry, or when they are on the decline and Spotify is considered a favourable alternative by users around the globe.
- General market momentum: Despite being a Swedish company, Spotify is traded on the New York Stock Exchange. Therefore, events such as a change in US government policy or a Fed rate decision, which impact the American market, could also affect its price. The other side of the equation is that it can also be affected by factors relating to the European/Swedish markets, which do not affect its American competitors.
- Music licensing agreements: Much of Spotify’s business has to do with attaining licences for playing artists’ music and paying them royalties. When the company filed with the SEC for a public listing, it was revealed just how complicated this process is. Therefore, reports in the media regarding usage rights and agreements with musicians could impact the SPOT stock.
Spotify: Skipping the IPO
Unlike many of its counterparts in the tech space, Spotify decided not to hold an IPO when going public. Instead, the company opted for a direct public listing, which made its existing stocks liquid on the market, rather than issuing new stocks. A public listing is less common than IPOs since the company going public cannot raise capital with this process. However, it does cut through a lot of the ‘red tape’ involved with an IPO and saves costs, such as paying underwriters (a major financial institution that manages the process) or other fees. When it went public, many analysts said that a direct listing could become the method of choice for companies such as Spotify, who are already maintaining a steady revenue stream before going public.
History of Spotify
Spotify was founded in 2006 in Sweden. The company supplies streaming of music, podcasts and videos, to both mobile and desktop devices. Spotify’s user base constantly grew, as it offered an increasing selection of music, using a ‘freemium’ business model. This means that while using the app’s basic features is free, advanced features, such as commercial-free listening and high-quality audio are reserved for paid users. Over the years, the company reached tens of millions of users around the world, prompting companies such as Apple, Google and Amazon to offer similar services.
As part of its licensing agreements, the company paid some $5 billion in royalties during its first 10 years of operation, and at least $1 billion per year ever since. When the company went public, its filings revealed that it has not been profitable over its first 12 years of operations. In 2017, the biggest IPO in tech was that of Snap Inc., maker of Snapchat, which publicly declared it might never become profitable. However, as of 2018, Spotify has not made a similar statement, meaning it is most likely gearing towards improving its business model.
Conclusion: Spotify could stream into success
Being a multi-billion company with a 12-year track record when going public, Spotify held some advantages over other tech companies when going public. Moreover, its choice of a direct public listing, rather than an IPO, means that the SPOT stock price might reflect its actual valuation, and not be driven by speculation or early adopters wanting to drive prices up. Either way, being a pioneer in streaming, having tens of millions of users and generating a steady revenue stream, means that the right business choices could make it a profitable company, rivalling the other giants of the tech world.