Spotify stock reference price set at $132 a share, placing company valuation at $23.5 billion

Spotify, the world’s largest music streaming service, made its debut on the New York Stock Market this morning with its reference price set at $132 a share. That puts the company value at $23.5 billion, and is on target with what CNBC reported last month when shares were traded on private markets were for as high as $132.50 a share. Spotify’s last valuation was at $8.4 billion when it raised a financing round of $400 million back in 2015.

Sweden-based Spotify is available in 61 countries with an overall user base that includes ad-supported free listeners of 159 million, and 70 million paying users as of January 2018. The company was founded in 2006 by Martin Lorentzon and Daniel Ek, who remains its current CEO.

For its public offering, Spotify has taken an unconventional and somewhat risky approach called direct listing, a route normally taken by small-cap companies, usually in biotech and life sciences. It’s a less expensive alternative to an IPO where the business sells shares directly to the public without any intermediaries, but it also means drawbacks like no deal support from the bankers.

Ek explained his position in a company blog post published yesterday. “Spotify is not raising capital, and our shareholders and employees have been free to buy and sell our stock for years,” he wrote. “So while tomorrow puts us on a bigger stage, it doesn’t change who we are, what we are about, or how we operate.” Spotify is the biggest company to ever go public via direct listing, and the first on the NYSE.

Spotify’s IPO paperwork showed that it is going through a tremendous amount of cash — posting revenue last year of €4,090 million (nearly $5 billion) and a net loss of around €1,235 million (or about $1.5 billion) for the same period — but its gross margin is growing, thanks to newly negotiated licenses with the major labels. These deals not only reduce Spotify’s royalty payouts, but will allow the company to predict their music costs for several years.

However, there are obstacles for Spotify to dodge as it continues to grow. Recently, it had to crack down on users running modded versions of the app to stream music for free while blocking ads. Spotify’s IPO filing notes that about 2 million users are getting around ads on Spotify without paying, or about 2.3 percent of all free Spotify accounts. It also has some odd lawsuits still lingering around, like the one filed by Wixen Publishing over mechanical licenses to the tune of $1.6 billion.

Despite this, it’s impossible to deny Spotify’s success over the years as one of the earliest and most promising music streaming businesses. Its closest competitor, Apple Music, only has 36 million paid subscribers, although that number might surpass Spotify’s by this summer. But, even if that’s the case, Spotify is predicting it will be just fine in 2018 by continuing to focus on its central revenue stream of user subscriptions. The company is predicting as many as 96 million paid subscribers and a 30 percent increase in revenue to $6.6 billion by year’s end.

Bumping up subscriptions alone likely won’t fix the catch-22 of Spotify’s business model, where the more money it makes, the more money it pays out to the labels. It needs to find additional revenue streams or continue to work on reducing label payouts. The latter is a tough ask. Trying to appease everyone when no one is satisfied is not an enviable position for Spotify, but it’s the one they’re currently in. Artists are already only making fractions of a cent per stream on the platform (less than Apple Music but considerably more than YouTube), and labels are still slow to change old habits and recognize the new, modern market of music consumption. This doesn’t leave Spotify without options; it could give the labels greater equity, for example.

Ultimately, how successful Spotify’s public offering is will depend on whether investors believe there is a light at the end of the tunnel when it comes to profitability and how sustainable its business model is, not just for its own bottom dollar, but for the artists that are its lifeblood.

Share and Enjoy

Stocks Sink After China Announces Duties on US Exports

(NEW YORK) — Stocks tumbled Monday after China raised import duties on a number of U.S. exports, bringing the two economic giants closer to a full-on trade conflict. Big technology companies, long investor favorites, suffered heavy losses.

The deepening worries over newly protectionist U.S. trade policies combined with blowback toward technology companies, including Facebook’s ever-widening privacy scandal, have prompted investors to pull money out of the market. That has meant steep drops in former big winners including Netflix, Microsoft and Alphabet, Google’s parent company.

Among other recent winners, Intel dove 6.1% following a report in Bloomberg News that Apple plans to start using its own chips in Mac computers, and Amazon sank following more broadsides from President Donald Trump on Twitter.

The Dow Jones industrial average fell as much as 758 points, although major indexes regained some of their losses later in the afternoon. The Dow lost 458.92 points, or 1.9%, to 23,644.19. The SP 500 index gave up 58.99 points, or 2.2%, to 2,581.88.

The Nasdaq composite slumped 193.33 points, or 2.7%, to 6,870.12. The Russell 2000 index of smaller-company stocks fell 36.90 points, or 2.4%, to 1,492.53.

Kate Warne, an investment strategist for Edward Jones, said the step by China is small but significant.

“The fact that a country has actually raised tariffs in retaliation is an important step in the wrong direction,” she said. “The tariffs imposed by China today lead to greater worries that we will see escalating tariffs and the possibility of a much bigger impact than investors were anticipating last week. And that could be true for Mexico as well as for China.”

Food maker Tyson dropped 6.2% after China raised import duties on a $3 billion list of U.S. goods in response to the tariffs on imported steel and aluminum that President Trump ordered last month.

Amazon fell another 5.2%. The online retailer has slumped with the market recently, although it’s still up about 17% in 2018. Trump has repeatedly criticized Amazon over issues including taxes and Amazon’s shipping deals with the U.S. Postal Service.

Jack Ablin, chief investment officer of Cresset Wealth Advisors, said Amazon is just the latest company to falter after it drew scrutiny from the government, as Facebook and Alphabet have slumped recently on data privacy concerns.

“It seems like the long arm of the government is interfering with investors’ expectations,” he said. “Investors are pricing in an escalating trade war and regulation of tech companies.”

Microsoft dropped 3% and Alphabet, Google’s parent company, shed 2.4%.

After a month of public negotiations between the U.S. and several other countries, Monday marked the first time another country has placed tariffs on U.S. goods in response to the Trump administration’s recent trade sanctions.

The price of gold climbed 1.2% to $1,343.60 an ounce and silver jumped 2% to $16.60 an ounce as some investors took money out of stocks and looked for safer investments.

Health insurer Humana was one of the market’s few winners following more reports Walmart could buy the company or create a new partnership with it. Humana is a major provider of Medicare Advantage coverage for people 65 and older. Humana gained 4.4% while Walmart slid 3.8%.

Bond prices finished little changed. The yield on the 10-year Treasury stayed at 2.74% after a sharp decline last week.

Energy companies skidded as benchmark U.S. crude lost $1.93, or 3%, to $63.01 a barrel in New York. Brent crude, used to price international oils, slid $1.70, or 2.5%, to $67.64 a barrel in London.

Wholesale gasoline dropped 5 cents to $1.97 a gallon. Heating oil fell 4 cents to $1.98 a gallon. Natural gas slid 5 cents to $2.68 per 1,000 cubic feet.

Copper rose 2 cent to $3.05 a pound.

The dollar declined to 105.85 yen from 106.50 yen. The euro edged up to $1.23 from $1.2306.

Trading in France, Germany and Britain was closed for Easter. Japan’s benchmark Nikkei 225 lost 0.3 percent and South Korea’s Kospi fell almost 0.1 %. The Hang Seng in Hong Kong was closed as well.

Share and Enjoy