The music streaming giant Spotify recently became a publicly traded company and on the first day of trading,its initial public offering (IPO), the price for shares closed at $163.90. This means that the company is now worth around $26.6 billion and the news has left investors wondering whether Spotify will be the next Netflix or whether it will fair less well on the New York Stock Exchange (NYSE) and suffer a similar fate to the radio streaming company Pandora.
The Netflix Story
Those who have undergone spread betting training and who are able to spot a good investment opportunity when they see one, may be inclined to see Spotify as going the same way that Netflix did after its IPO in May 2002. Back then Netflix was a, relatively small, DVD mail order service with less than 700,000 subscribers and a valuation somewhere in the region of $300 million. Netflix, however had vision, a plan and a man who would execute that plan to perfection. Barry McCarthy was the Netflix chief financial officer (CFO) who was responsible for stewarding the company into the streaming sector and to a large degree is responsible for Netflix current worth – $130 billion.
McCarthy is now CFO at Spotify and just weeks before his new company’s IPO was quoted as saying “This reminds me of my first 10 years of Netflix”.
The Pandora Story
The story is somewhat different for Pandora, who offer a radio streaming service and whose IPO occurred in June 2011. At the time Pandora’s user numbers were rapidly growing and in a period where tech stocks were particularly hot, the company had an impressive and lucrative IPO— at $16 per share the company was worth around $2.6 billion. Problems in the business model, however, have taken their toll and currently the shares are worth only around a third of the IPO price and appear to have flatlined at that price. The problems are related to advertising revenue, that has not materialised as expected, because Pandora have been unable to target the ads with enough accuracy.
The Spotify Story (so far)
On the face of things Spotify are more akin to Netflix and so are far more likely to continue the success that they have enjoyed to date and that has facilitated their public debut on the NYSE. For instance, Spotify have effectively recruited millions of subscribers who pay a monthly fee in order to use their services. Not only that, in addition, Spotify is able to operate carte blanche in the world of musical artists. They have signed up so many of the most successful and influential artists that if one or two big names refuse to toe the line, think Taylor Swift, then business remains unaffected.
Investors, however, are not without their concerns when it comes to the Spotify business model. Scratch below the surface of Spotify and potential weaknesses are all too plain to see. For example, should they encounter a problem with one of the major record labels, who effectively own the artists, this could be damaging.
The crux of the matter, when it comes down to whether or not Spotify is a good investment, may be how well the company can deliver on its growth targets for 2018 – the goal is to have 96 million monthly subscribers by the end of the year. Statistics that come out having traded the first quarter of 2018 are likely to give investors a good idea regarding whether or not Spotify is on track to hit their goals and if they are not then the board of directors may be left wondering if opening Pandora’s box was the right thing to do.
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