Spotify Technology: Taking an Unusual Path to Public Ownership

May 22 2018

Founded in 2006 by Martin Lorentzon and Daniel Ek, and based in Stockholm, Spotify Technology (NYSE: SPOT) is the world’s largest provider of music streaming services. Consensus estimates call for revenue of €5.2 billion in 2018, followed by €6.6 billion Euros in 2019. The company is expected to report a loss per share of €1.49 in 2018, followed by another loss of €0.75 per share.

Spotify took an unconventional path to public ownership by directly listing its shares directly on the New York Stock Exchange, thus choosing to work without a team of investment banks to underwrite and support its stock in the after-market. The company’s shares began trading on April 3, at an initial listing price of $132, in line with its valuation on private stock exchanges. At a recent share price of $160, the stock’s market cap is roughly $27 billion.

Spotify’s music streaming service allows listeners to access songs from among the company’s library of 35 million tracks. The company places a great deal of emphasis on personalizing the music listening experience through its music search and discovery engines, along with playlists that are created by the company, based on listener interests. The company counts 170 million monthly active users (MAUs), of which 75 million are premium subscribers, who pay a monthly fee for its service, while 99 million are ad-supported MAUs. Premium subscribers account for roughly 91 percent of revenue, while ad-supported listeners account for the remainder. In addition to the lack of commercial interruption, premium subscribers can access a wider range of the company’s 35 million tracks. In the first quarter of 2018, Premium revenue grew by 25 percent, while ad-supported revenue grew by 38 percent, for a weighted average growth rate of 26 percent. Premium subscriber growth has been driven in part by the company’s family plan, which allows up to six premium subscribers for a flat monthly fee.

Based on its internal estimates and outside industry reports, Spotify estimates that it holds a 42 percent global revenue market share of the music streaming business, with the US, Brazil, and the U.K. its three largest markets. The company believes that its 75 million paid global subscribers are more than double that of Apple, its next closest competitor. However in the US, Apple is gaining ground with its Apple Music service, and the company may surpass Spotify in US market share this summer.

Spotify’s business model, like that of other streaming services, such as Pandora Media, is heavily influenced by royalty and other payments that Spotify must pay to the musical artists whose songs are accessed by its listeners. Thus, in the most recent quarter, Spotify’s gross margin was 25 percent, the same level as the preceding quarter. In Q1, Spotify reported an operating loss of €41 million, versus €139 million in the prior year. Spotify has a decent balance sheet, with €1.6 billion in cash and investments, along with convertible notes of €1 billion. The company, by its calculation, is free cash flow positive, and intends to remain so, with the exception of capital expenditures associated with the build out of new and expanded offices in New York, London, Los Angeles, Stockholm, Boston, and other cities.