Spotify Technology embarks on its public life with no lack of intrigue.
The music streaming service’s direct NYSE listing today represents a clean break from traditional IPO underwriting and the most direct threat to that process.
The NYSE provided an indication of potential opening Monday night by providing a reference price of US$132.00, though Citadel Securities will determine the opening price in its role as designated market maker.
That Spotify is a global brand that had no need for funding and a desire to provide immediate liquidity for all investors arguably puts it in rarefied territory.
Taking its case directly to the markets promises a potential torrent of selling and buying on day one.
Roughly 162m shares are potentially available for sale immediately, representing a 91% free float with only Tencent and its 16.2m shares locked up.
However, it is unlikely that many shares will be made available given certain ownership stakes.
Spotify co-founders Daniel Ek and Martin Lorentzon are unlikely sellers of their stakes, at 49.6m and 23.6m shares, respectively.
Others, such as Sony Music, may be motivated to hang on for strategic reasons. Selling by key holders would certainly send the wrong message about the company’s long-term prospects.
BROKERING THE OPEN
Some are warning the music streaming service’s stock will be volatile and the first session a minefield for inexperienced retail investors trying to gauge value.
But Citadel Securities, which after all is the world’s leading market maker and whose automated equities platform trades roughly 20% of US equities volume, will be trying to find a fair clearing price at the open that reflects the range of market views.
And whatever reservations there are about this process, it will take some doing for this exercise to be considered any worse than some of last week’s IPOs.
The true intrigue, at least initially, is around valuation.
Recent trades in the private market imply a valuation of as high as $23.6bn, or US$127.50 to US$132.50 a share, making it must-own based on its leading market position.
RBC Capital Markets weighed in Friday, initiating with an outperform rating and US$220.00 price target.
The assessment is based on a 5-times EV-to-sales multiple on their estimated 2019 revenue of €6.7bn ($8.3bn). Spotify’s ‘current’ valuation represents only 3.7-times multiple, and is a “very reasonable” discount to the 7-times multiple of Netflix, the bank argues.
Then again, investors are not exactly in a buying mood – Netflix tanked 5.1% on Monday and the NYSE FANG+ index fell 3.4%, taking losses since mid-March to 14.3%.
THE INITIAL SPLASH
Dropbox scored a 35.6% day-one gain on debut last month, transferring some US$300m of value on the US$850m raised for itself and selling shareholders. The same fate will not happen to Spotify because the company is not selling shares, its investors will decide when and at what price to sell.
Then again, Dropbox is one of the exceptions when it comes to recent IPO success stories. Six of the last eight US listings are trading below offer, with the exceptions being Dropbox and early-stage drug developer Homology Medicines.
Spotify has been far more willing to facilitate private stock sales, so arguably its valuation is already seasoned. If that is the case, seasoning should translate into a somewhat muted debut approximating recent private trades.
On the margin, critics will point to volatility as evidence of a disorganized shareholder registry that would make raising capital in the future problematic.
Spotify, however, remains unfazed by the intrigue.
“Tomorrow does not become the most important day for Spotify,” Ek said in a blog post Monday. “It’s the day after, and the following day that matters – and all those days to come.
“Our focus isn’t on the initial splash. Instead, we will be working on trying to build, plan, and imagine for the long term.”
