The Largest Tech IPO of 2018 Is Overhyped


I confess … I am one of those who sing a little too loud (and are a little distant) when I have my headphones. Especially if "Do not Stop Believin" from Journey arrives.

I can not help but, the music moves me … to the chagrin of anyone within earshot.

In fact, most of my iPhone's memory is devoted to my playlists. Before I recently upgraded my storage, I really had to delete photos in order to keep all that music ready to play at your fingertips.

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

I've learned to shell out over $ 20 a month to buy Apple songs. I know that it is totally useless with the streaming technology of today. But I was stuck in my ways.

So recently, I managed … and joined the famous Swedish live listening service, Spotify. And I never do a U-turn.

So when Spotify – valued at about $ 20 billion – announced its March / April takeover bid in a unique way, I pulled myself together. I've started to run the headlines, and analysts are already calling this the biggest initial public offering (IPO) technology of 2018. The anticipation is huge!

But, alas, I am a cynic at heart. Despite my enthusiasm, I had to ask myself the following question: is the hype of the Spotify title really worth it? So today, let's take a detailed look at this IPO to find out.

Talkin 'bout a musical revolution

In my mind, Spotify is one of the most important innovations in music since Kurt Cobain may have come up with breathtaking comments and crude, nauseating words about teenagers.

The concept is simple: you play music on the Internet. Free. Or, at most, a small monthly fee of $ 9.99. You just need the Spotify application to access all this.

When Spotify was launched in October 2008, it was a revolutionary revolutionary idea. That's why the company helped launch the streaming music market by paving the way for services such as Apple Music (the Apple streaming service went online much later in 2015).

Spotify is an endless and friendly treasure chest.

You listen to what you want, where you want, when you want it. The application is compatible with virtually any device I can think of, from computers to smartphones through tablets.

And if all this music seems unbearable to you, do not worry: you can also use its unique music discovery function to find songs that match your musical tastes.

The entire platform is a great idea.

Unfortunately, investors like us could not participate in this revolutionary service because the company was privately owned for a decade. So, now that we can soon participate in the stock, we must make sure that it is worth it.

The Times, they change to 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 by 2021. That's good, but that's a growth rate compounded 4.2%, down from the remaining 4.4%. % of forecasts made in 2016.

This means that the old school entertainment industry is beginning to stabilize. To solve this problem, the industry must focus on building lasting relationships with customers.

After all, the consumer is king. For recordings – movies, television, music – we will dictate what we want to see, hear and experience. We vote with our time, our attention and a small subscription (think Netflix, Amazon Video and Hulu).

Just as industries and products such as health care, cars, refrigerators, thermostats, etc., had to revolutionize – see precision medicine and the Internet of Things – just like entertainment.

And this revolution is here. Spotify is only one of the big players.

That's why Spotify has about 140 million active listeners, 70 million of whom pay extra for advanced features. Better yet, the service has 30 million songs and adds more than 20,000 songs a day.

It also contains over 2 billion playlists, generated by the growing base of users of the company (an excellent idea that engages the customer much more directly), and 5 million additional playlists are created or edited every day.

This is obviously 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 jumped 52% to $ 3.09 billion in 2016. But the net loss more than doubled to $ 568 million. (Although the adjusted net loss is rather around $ 310 million.)

For example, about $ 2.62 billion of this revenue has evaporated with the cost of goods sold. An additional $ 440 million has disappeared from sales 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 last year, Display panel calculated.

But we need to see the company generate positive revenue.

Spotify is not. So the numbers have made me raise an eyebrow. Keeping this in mind, I turned to Paul Mampilly for his opinion on Spotify's public listing.

Paul Mampilly talks about the Spotify stock

Paul is our main contact for all pertaining to disruptive technologies. I knew then that he had to have some interesting ideas about it. Here's what he said:

Spotify's public listing is interesting from two perspectives: first, it's a non-traditional IPO because it allowed Wall Street to stop pricing. Instead of making shares available to the general public, Spotify will register directly with the stock market. This means that only institutional investors have access to it, eliminating the need for banks to set an initial price, link sellers and buyers, and so on. This makes initial trading uncertain, as Wall Street's participation provides price stabilization for IPOs.

Secondly, Spotify still loses money, although it has a large number of subscribers. However, it is also a subscription activity, which involves repeating the recipes – it's a great model. Plus, like Netflix, it's a global business, so it can continue to grow.

So Spotify's main concern is: Are there enough people who will buy the IPO so that you want to participate from the first day? Because most of the time, you have a chance to buy it lower. This is because most people play IPOs for a quick pop on the first day or the first week, and then reject them.

I say that people who want to buy stocks as an investment have to wait their turn, wait to see how the stock trades – and see how Spotify's business is developing over a few quarters. Then you can build your position over time, if things look good.

Overall, Spotify is an amazing product with an excellent model. This could ultimately lead to profitability. But this is a "wait and see" one. Do not be caught in all the hype for now!

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