Uncertainty Surrounds Spotify’s Confidential IPO Filing

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Spotify - Uncertainty Surrounds Spotify’s Confidential IPO Filing

Spotify AB has filed its prospectus with the Securities and Exchange Commission, according to a report from Axios. This is certainly no surprise. Rumors of the streaming music service going public have been widely circulated for some time.

Fueling these rumors was Spotify’s most recent convertible financing, which put in place onerous penalties if there was not an initial public offering (IPO) within a certain period of time.

According to InvestorPlace’s Ian Bezek: “Spotify’s hand is forced. They have to go public as quickly as possible to avoid this convertible debt from turning into a millstone.”

Yes, investors can be brutal.

Details on Spotify

Unfortunately, there is little information available on Spotify’s IPO filing. Because the company filed its papers on a confidential basis, we will likely not get access to the S-1 for a couple months or so.

But there are some things we do know about the company:

  • In 2017, Spotify was on track for sales to jump by 40% to $4.9 billion.
  • While gross margins have improved, the company is still posting losses.
  • There are over 60 million subscribers (at an average fee of $7.80 per month) and more than 140 million active users.
  • The Spotify platform has over 30 million songs.

Spotify, which was founded in 2006, has been able to fend off tough rivals like Apple Inc. (NASDAQ:AAPL), Alphabet Inc (NASDAQ:GOOGL) and Amazon.com, Inc. (NASDAQ:AMZN). Throughout everything, CEO and co-founder Daniel Ek has proven to be an able leader.

But running a public company is no easy feat. Just look at the travails of recent deals like Snap Inc (NYSE:SNAP) and Blue Apron Holdings Inc (NYSE:APRN). Wall Street has little tolerance for flubs.

In fact, there are already ominous signs for the Spotify IPO. Wixen Music Publishing Inc recently filed a lawsuit against the company, claiming as much as $1.6 billion in damages regarding issues with licensing and compensation. The firm has rights to songs from artists like Tom Petty, The Doors and Stevie Nicks.

Keep in mind, however, that lawsuits are common when a company is in the process of going public. Litigation can be a great way to potentially damage a rival or to get a better negotiating position.

Spotify Is Pursuing a Direct Listing

Interestingly, the biggest risk factor for the Spotify IPO could be the way the company wants to pull off its deal. The company would avoid using Wall Street underwriters — and instead issue shares directly to the public.

Now there are advantages to this.

Spotify will not have to pay the substantial fees. What’s more, there will likely be more retail participation in the offering. Such investors tend to hold on to their holdings longer. And to top it off, Spotify has a large number of loyal customers that would definitely want to buy into the deal.

Then what could go wrong?

Well, underwriters can be extremely helpful. They can be strategic in placing shares. And yes, the fees provide a nice incentive to raise a large amount of capital.

Wall Street bankers will also try to structure a deal to have a “pop” on the first day of trading. While this is often the source of controversy, this does make it more enticing to get big shareholders on board. Who doesn’t like a quick gain, right?

Bottom Line On The Spotify IPO

In light of all this, there is uncertainty about the Spotify IPO. How will it do on the first day? Are there enough shareholders to provide support?

Such questions will be tough to answer — and this will inevitably mean that some investors will hold off.

But none of this means that the Spotify IPO will be a failure.

Perhaps the direct offering will be smooth, allow the company to achieve its objectives, and even change the way some tech companies go public in the future. But a direct offering definitely has its risks and could make this deal dicey.

Tom Taulli is the author of High-Profit IPO StrategiesAll About Commodities and All About Short SellingFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

Tom Taulli is the author of various books. They include Artificial Intelligence Basics and the Robotic Process Automation Handbook. His upcoming book is called Generative AI: How ChatGPT and other AI Tools Will Revolutionize Business.


Article printed from InvestorPlace Media, https://investorplace.com/2018/01/uncertain-spotify-ipo-filing-confidential/.

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