One of the more anticipated initial public offerings recently, Spotify Technology S.A. (NYSE:SPOT) is off to a mixed start. On its opening drive, Spotify stock jumped out to $165.90 before closing at $149.01. Against its reference price of $132, a near-13% move isn’t a bad way to get things rolling. But with a recent close of just under $144, is it worth taking a shot on SPOT?
I can see why investors are intrigued. Primarily, SPOT stock didn’t partake in the traditional IPO journey. As our own Tom Taulli explained, “the company listed its shares on the NYSE and existing shareholders sold their own holdings,” foregoing the capital raising process. We didn’t see the usual pomp and circumstance, with corporate executives making their sales pitch.
I guess you can say that Spotify didn’t have to do that, or at least they think they don’t. In time, however, I think they’ll regret not going the traditional route. Spotify stock needs all the help it can get.
I’m not a big fan of covering IPOs because the markets can easily lose their heads. Taulli mentioned Snap Inc (NYSE:SNAP) and Blue Apron Holdings Inc (NYSE:APRN) as cautionary tales because they’re “consumer-type” operators: in other words, their businesses are relatively easy to replicate and no compelling reason exists to use their services.
This isn’t to say that these two companies are junk investments (although I think they are); rather, they don’t offer something that consumers can’t get somewhere else.
SPOT stock falls into this same category. Consumers don’t have a compelling reason to join Spotify. Worse yet, the hard evidence proves this point.
Sub Growth Doesn’t Hit the SPOT
Taulli and other analysts mentioned that SPOT has 71 million paying subscribers, which is comparatively impressive. Apple Inc. (NASDAQ:AAPL) only has 38 million, so the haul sounds impressive. In reality, this is hardly a reason to get excited about Spotify stock.
Here’s the dirty little secret that bullish proponents won’t mention: the company’s sub growth has matured, and I think quite badly. While its average growth rate since July 2010 is nearly 32%, that statistic cratered to only 7.1% in the past three quarters. IPOs are usually about investing in an emerging organization. In contrast, SPOT stock is over the hill.
You might say they’re suffering a few bad quarters. Eventually, they’ll recover. I highly doubt it. Since 2016, their growth rate is less than 18%. Between 2011 and 2015, the metric nearly hit 42%. So no, it’s not a few bad quarters; it’s a paradigm shift for Spotify stock and not in a good way.
Spotify Stock Has Fierce Competition
Whatever discussions are going behind Spotify’s closed doors, I don’t want to know. SPOT stock reminds me of an inadvertently slow pitch hanging in the strike zone. Any batter worth their salt will knock it into the stratosphere.
While the company has 71 million subs, as I demonstrated, it’s contextually not an impressive number. Thus, Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) and Amazon.com, Inc. (NASDAQ:AMZN) are licking their chops. They have the resources and the immeasurable influence to wreak havoc in this sector.
And honestly, what’s Spotify going to do about it? Their earnings are going from bad to worse, and many analysts openly question whether it will ever be profitable. The answer is a resounding no.
Yes, they’re raising their top-line sales, but they’re also paying an increasing amount of operating expenses. Furthermore, with maturing sub growth, their expenses may intractably outpace their revenues. That’s not something I want in an investment, which is why I’m not getting involved with Spotify stock.
The Music Industry Stinks
No, you don’t have bad taste in the arts. Music today really does stink, and for good reason: every hit song over the last several years was written by two, middle-aged Swedish dudes.
Now, I’m not entirely sure if every single breakout hit fell into this debacle, but the majority do. This ruse has been going on for a long time, but eventually, consumers get tired of it. I suspect that’s the reason why Spotify hasn’t been able to generate much sub growth lately.
Here’s another example: Taylor Swift’s “Reputation” tour has so far produced lackluster ticket sales. If you’re a “Swiftie,” you’re in luck. Thousands of seats are still available in venues across the nation, and for increasingly cheaper prices.
If fans can’t get excited about the world’s hottest act, that’s not a good sign for SPOT stock. The company already has enough problems. Add a declining industry, and I see absolutely zero reason to risk my money.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
