Spotify made its highly anticipated Wall Street debut on Tuesday, with an opening price of $165.90, giving the music streaming company a valuation of $29.5 billion.
Spotify’s market debut, however, was unusual. The streaming service, which trades under the symbol SPOT, bypassed many of the traditional steps of a Wall Street IPO. Company executives did not conduct a roadshow to convince big institutional investors, such as pension and mutual funds, to buy shares. Its chief executive even skipping the usual New York Stock Exchange ritual of ringing the opening bell. Epic Players, a theater group, preformed the honors.
Instead, Spotify is conducting a direct listing in which it will not raise money but will allow employees and investors to sell their shares.
“For us, going public has never really been about the pomp or the circumstance of it all,” Daniel Ek, Spotify’s founder and chief executive, said at an investor day presentation last month. “So you won’t see us ringing any bells or throwing any parties. And despite the enormous respect I have for the New York Stock Exchange in this process, I also won’t be on the floor doing any interviews.”
If Spotify’s stock rises in the days and weeks ahead, its direct listing could become a road map for the array of multi billion-dollar tech companies that investors are hoping will go public soon, including Airbnb, Lyft and Uber. “It opens the door to any unicorn out there that focuses on the consumer,” said Nicholas Colas, co-founder of DataTrek Research.
Analysts say that the direct listing could lead to wild price swings or a drastic mismatch of buyers and sellers.
The streaming service’s market debut has long been anticipated by investors. Launched in 2008, the company claims to have nearly 160 million monthly active users, across dozens of countries. It says it believes it has more than twice as many paying customers as its closest competitor, Apple Music, according to SEC filings. Apple has said 36 million people pay to use its music streaming service, according to the Wall Street Journal.
Spotify has positioned itself as a key contributor to the reversal of the music industry’s decline, by convincing millions of people to pay for an on-demand music subscription service.
The company’s growth has been matched by increasing losses. It generated about $5 billion in revenue last year, up more than 40 percent from 2016, and a $1.5 billion net loss compared with about $664 million in 2016.
Spotify declined to comment for this story, citing the SEC-mandated “quiet period,” which restricts companies from making certain public statements during the going-public process.
Spotify’s unusual approach required the 200-year old NYSE to change its rules and secure approval from the Securities and Exchange Commission. It also allows the company to avoid some of the most frustrating aspects of a traditional public debut. Employees and investors do not face the same restrictions on when they can sell their stock, for example.
“It’s an untested process,” said Matt Kennedy, IPO market strategist for Renaissance Capital LLC, an investment research firm. “It has never been done for a company of this size.”
For Spotify, the direct listing process will save money by minimizing the role traditional Wall Street banks play in the process. Instead of paying more than $65 million in fees to Wall Street investment banks, Spotify is likely to pay half as much, market analysts said.
Bank underwriters typically play an essential role in introducing companies to large investors, said Lise Buyer, an IPO consultant with Class V Group. But Spotify is already well known and doesn’t need those types of introductions, she said.
It will also not be selling any new company shares. Instead, company insiders and investors will be selling their existing stock. Many of these employees typically would have been barred from selling their stock for at least 180 days in a traditional IPO, Kennedy said. A direct listing eliminates those restrictions and allows them to potentially profit from the IPO immediately.
“You don’t want to underestimate how important it is to insiders to be able to sell right away,” Kennedy said. “In the short term, they are the ones benefiting” from a public debut.
The direct listing also bypasses another Wall Street tradition: offering shares of an IPO to hedge funds and other preferred investors at a discount, said Jay Ritter, a business professor at the University of Florida, who tracks IPO data. These investors typically see the value of their shares rise quickly and sell them, pocketing a quick profit, he said.
“That is why Wall Street doesn’t want direct listings to be common. They take power away from the underwriters to allocate shares to their most profitable customers,” Ritter said. These customers have come to expect preferential treatment in large market debuts, he said.
However, a direct listing comes with risks. It is unclear how many shares insiders will offer up for sale or how much demand there will be for them, market experts say. The stock market has also been volatile recently with the Dow Jones industrial average falling more than 450 points, or nearly 2 percent, Monday. That could make it even more difficult for investors to settle on the right price for Spotify’s stock, they say. It is also not known at what price the stock will start trading Tuesday.
“We know the potential number of shares that can be sold, but it’s just up to the insiders,” Kennedy said. “It could be 1 million and then 100 million by Wednesday. It is definitely not a normal IPO.”
Spotify has also warned that after not using a bank underwriter, its stock price could be more volatile than normal during the first day of trading. It will not have some of the safeguards traditionally provided by investment banks, which try to prevent new stock from falling below a certain price.
“If the stock is choppy when it takes off, the stabilization agent attempts to create a floor of where the stock price could go,” Buyer said. “The biggest risk is we don’t know where these shares are going.”
