Last week, music streaming behemoth Spotify confirmed its plans to begin trading on public markets through a direct listing on the New York Stock Exchange. Shares will be available under the ticker "SPOT" soon, but until then, investors will continue to debate whether Spotify's rare take on an IPO was the right choice.
Spotify hopes to generate $1 billion through its initial offering-but the lack of a fundraising event and no traditional underwriters means that an exact total is not guaranteed. The direct listing might give retail investors an opportunity to participate in the IPO, or its mysterious nature could scare off average Joes and massive money managers alike (also read: Spotify's Road to a $1 Billion IPO ).
But Spotify's choice to go public through a direct listing is just one of the many debates that investors will find themselves in as the innovative company finally hits the market. As with any IPO, our focus must also shift toward establishing a fair valuation for the music platform.
Spotify was reportedly valued at $19 billion through its latest round of private funding. The company also recently raised about $1 billion in convertible debt on the promise that lenders would receive a 30% discount on its IPO shares, which maintained Spotify's high valuation without diluting its existing stakes.
On top of this, we know a few details about the foundation of the company's business. Spotify said that it has 159 million monthly active users, with 71 million of those paying $9.99 per month for the premium version of the platform. Spotify's premium customers are likely more valuable in terms of revenue, but the company does generate advertising revenue from free users.
Spotify's public filing revealed that the company generated roughly 4.09 billion Euros in revenue last year, up from 2.95 billion Euros in the year-ago period. However, losses increased to 1.2 billion Euros in 2017 from 539 million Euros in 2016.
Nevertheless, at least one key analyst sees a relatively-quick path to profitability for Spotify. In fact, in a recent report, Rob Sanderson of MKM Partners suggested that the company could be making as much as $2.7 billion as soon as 2022.
Sanderson also mentioned that Spotify could reach a public valuation of $70 billion by 2021. The analyst sees the next three years as a key growth period for the company, with countries that Spotify is not yet offered in reaching 1.4 billion payment-enabled smartphones in that timeframe.
And while some view the global music business as a challenge to Spotify's potentially disruptive model, MKM Partners seems to consider the evolving nature of the industry an advantage for the platform.
"We think the growing friction within the industry is between artists and labels," Sanderson said, via Benzinga . "Labels continue to take the large majority of economics while their value-add is diminishing in a streaming world."
Spotify paid an estimated $3.2 billion in royalties during 2017, representing about 20% of the music industry's total revenue, according to MKM.
Still, record labels certainly aren't the only challenge facing Spotify. The streaming giant continues to face litigation from artists looking for a fair cut of royalties, while other rising platforms threaten its current dominance.
Most notably, tech behemoth Apple AAPL and its Apple Music streaming service are closing in on Spotify. Apple Music is well behind Spotify with just 36 million paying users, but the platform is much younger and is currently growing at a faster pace.
Will Apple catch up to Spotify in the coming years? Is there room for two or more major streaming powers throughout the world? Is Spotify's path to profitability as simple as some analysts are suggesting?
These are the questions investors will face in the coming weeks and months as Spotify becomes the NYSE's hot new stock. The answers to these questions could also determine whether Spotify can surge to a $70 billion valuation in just three years.
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