Spotify was able to buck the bearish mood for technology stocks on Wall Street by making its unconventional debut on the public market at $165.90 (€135.27) a share, a 26 per cent jump from its starting point that values the music streaming company at about $29.5 billion. The shares closed the day at $149.01.
The strong valuation in opening trading, which came in the early afternoon after three hours of horse-trading by market makers, was significantly higher than its initial $132 reference point set on Tuesday morning and came despite a two-week tech sell-off that has wiped billions off Amazon, Facebook and Twitter.
In private trades in recent weeks, Spotify sold shares in the range of about $90 to $132.50 each.
Spotify opted for a direct listing on the New York Stock Exchange rather than a traditional initial public offering, heightening the uncertainty around its debut. The company warned the price could be volatile.
Unusual launch
As part of the unusual launch, the company is not selling any new shares. Daniel Ek and Martin Lorentzon, who co-founded Spotify 12 years ago, have no plans to sell their holdings, according to people with knowledge of their plans.
The smooth opening may set a new standard for highly-valued privately held technology to provide an exit for early investors without having to go through the bureaucracy of an IPO.
Spotify’s financial adviser Morgan Stanley and Citadel Securities, the designated market maker for the company on the exchange floor, worked to match buying interest and willingness of Spotify shareholders to sell to determine the opening price. The process turned back the clock on the NYSE floor, with traders gathering around managers from Citadel and their terminals.
Without a stabilising agent, market participants warned Spotify’s first day of trading would be more erratic than previous tech listings. Spotify highlighted this risk in regulatory filings, warning that the shares could “decline significantly and rapidly” upon listing.
In its initial trading, shares lived up to the billing, trading in a range from $160 to $169. Mr Ek, Spotify’s chief executive, tried to downplay short-term moves. “Our focus isn’t on the initial splash,” he said ahead of the listing. “Remember, tomorrow is just another day in our journey to fulfil our mission”.
No bells
Unlike the last big tech IPO on the NYSE, last year’s debut of social media group Snap, Spotify’s top executives – including Mr Ek, Barry McCarthy, chief financial officer, and Seth Farbman, chief marketing officer – spent the day at Spotify’s office in Manhattan’s Flatiron district, eschewing the fanfare at the NYSE floor.
“Normally, companies ring bells. Normally, companies spend their day doing interviews on the trading floor touting why their stock is a good investment,” the 35-year-old Mr Ek wrote in a blog post in which he quoted Daft Punk lyrics. “Spotify has never been a normal kind of company.”
Analysts were bullish even as Spotify’s market debut comes as the technology sector faces turmoil. MKM Partners initiated its coverage of the company with a target price of $200 a share, while RBC set a $220 price target.
The listing marks the culmination of years of work by Mr McCarthy, a former banker who led Netflix through a traditional IPO in 2002. Mr McCarthy joined Spotify in 2014 and pitched the idea of a direct listing to Mr Ek, according to people familiar with the matter.
Competition
Spotify is often credited with resurrecting the music business, after more than a decade of losses during which music appeared to be another media business unable to adapt to a digital age. The Swedish start-up has grown at a torrid pace, fending off competition from the world’s largest tech groups.
Spotify had 71 million paying subscribers at the end of the year, and expects to reach up to 100 million by the end of the year. It is trailed by Apple, which has 36 million subscribers, and Amazon, who on Monday said it had “tens of millions” of subscribers to its paid music service.
Spotify differs from peers in technology, such as Snap or Twitter, which have greater fixed costs. Every time someone streams a song, Spotify is charged a fee and the more users it adds, the more royalties it pays. Spotify made more than €4.1 billion in sales last year, a 40 per cent jump, but losses also widened to €1.24 billion.
“The fact that the company isn’t turning a profit means the price discovery mechanism of a direct float is even more likely to be choppy,” says Laith Khalaf, senior analyst at Hargreaves Lansdown. “Investors are going to have to choose from a host of secondary valuation measures in the absence of a traditional price/earnings ratio to latch on to.”
– Copyright The Financial Times Limited 2018
