Markets

Assessing Spotify's (SPOT) Post-IPO Valuation

A generic image of money and a calculator
Credit: Shutterstock photo

The initial public offering of Spotify Technology (SPOT), parent of music streaming app Spotify, came and went last Tuesday and it seems that Wall Street is still mixed about whether its IPO was a success or not.

While it was one of the most highly-anticipated IPOs this year, Spotify’s unconventional listing rubbed a lot of people the wrong way. The Swedish-based company opted for a “direct listing,” which meant that bankers and underwriters, who typically set the initial trading price (or range) via a typical order book, had little involvement.

The stock closed Friday at $147.92, up 2.73% on a day when not only did all the major indexes lose more than 2% led by a 2.34% decline in the Dow Jones Industrial Average, but it survived the prolonged tech selloff that continued to pressure the FAANGs — Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX) and Google (GOOG , GOOGL).

Given that the company achieved its listing goals of needing no capital and offering no new shares, categorizing its IPO as a failure wouldn’t be accurate. This is especially true given that SPOT stock closed on its first day of trading at $140.21, well above its reference price of $132. Still, Spotify doubters want to point out that its shares now trade below their first-day opening price of the $165.90, which granted it an initial $32 billion valuation.

Based on Friday’s closing price, the shares lost $6 billion in valuation from that initial $165.90 first-day opening price. And some analysts, citing (among other things) Apple’s competitive pressure, believe there’s more room for Spotify to fall, despite the fact that the company is already cash flow positive, growing rapidly and has the ability to scale globally. John Egbert, analysts at Stifel, who has a Buy rating and a $180 price target on the stock — implying a 22% premium from current levels — sees the Spotify as a buying opportunity.

“We think Spotify's market leadership, emerging markets exposure, favorable user demographics, the secular shift to mobile and digital services, as well as the near-universal appreciation of music, will support Spotify's growth for years to come," Egbert argued in a note to investors. While some view Apple and Amazon as possible threats, Egbert sees Spotify — which has 159 million monthly active users (MAU) and 71 million subscribers currently paying for its premium service package — reaching 300 MAUs in the next three years, while its paying subs will more than double to 160 million.

It remains to be seen whether Egbert will be proven right, especially at a time when Apple and Pandora (P) are ramping up investments to strengthen their own on-demand music streaming capabilities. What is clear, however, is that Spotify — with a valuation of $26 billion and growing annual revenue at 30%, looks discounted, given its dominant position in a large market with secular growth.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Richard Saintvilus

After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.

Read Richard's Bio