Technolgy Rules: Here’s why Spotify will go public via direct listing on April 3rd

Thursday, March 15, 2018

Here’s why Spotify will go public via direct listing on April 3rd

Spotify explained why it’s ditching the traditional IPO for a direct listing on the NYSE on April 3rd today during its Investor Day presentation. With no lockup period and no intermediary bankers, Spotify thinks it can go public without all the typical shenanigans.

Spotify described the rationale for using a direct listing with five points:

List Without Selling Shares – Spotify has plent of money with $1.3 billion in cash and securities, has no debt since it converted that into equity for investors, and has positive free cash flow
Liquidity – Investors and employees can sell on public market and sell at time of their choosing without investors shorting a lockup expiration, while new investors can join in
Equal Access – Bankers won’t get preferred access. Instead, the whole world will get access at the same time. “No underwriting syndicate, no limited float, no IPO allocations, no preferential treatment”.
Transparency – Spotify wants to show the facts about its business to everyone via today’s presentation, rather than giving more info to bankers in closed door meetings
Market-Driven Price Discovery – Rather than setting a specific price with bankers, Spotify will let the public decide what it’s worth. “We think the wisdom of crowds trumps expert intervention”.

Spotify won’t wait for the direct listing, and on March 26th will announce first quarter and 2018 guidance before markets open. It also announced today that there will be no lock-up period, so employees can start selling their shares immediately. This prevents a looming lock-up period expiration that can lead to a dump of shares on the market that sinks the price from spooking investors.

It’s unclear exactly what Spotify will be valued at on April 3rd, but during 2018 its shares have traded on the private markets for between $90 and $132.50, valuing the company at $23.4 billion at the top of the range. The music streaming service now has 159 million monthly active users (up 29 percent in 2017) and 71 million paying subscribers (up 46 percent in 2017.

During CEO Daniel Ek’s presentation, he explained that Spotify emerged as an alternative to piracy by convenience to make paying or ad-supported access easier than stealing. Now he sees the company as the sole leading music streaming service that’s a dedicated music company, subtly throwing shade at Apple, Google, and Amazon.

Wall Street loves a two-sided marketplace, so Spotify is positioning itself in the middle of artists and fans, with each side attracting the other. It’s both selling music streaming services to listeners, and selling the tools to reach and monetize those listeners to musicians. Ek discussed the flywheel that drives Spotify’s business, explaining that the more people discover music, the more they listen, and the more artists that become successful on the platform, and the more artists will embrace the platform and bring their fans.

You can follow along with the presentation here.