Spotify IPO reference price set at $132 for Wall Street debut

The New York Stock Exchange set a reference price for Spotify’s shares at $132 as the music streaming company makes debut on Wall Street on Tuesday.

The reference price is not an offering price for the shares or the opening price but it will play a part in the final Spotify pricing. The company isn’t issuing new stock so it hasn’t set a share price in advance.

Spotify, which will list under the SPOT ticker code, is making a direct jump into the market with its current owners selling 31% of their shares and no new shares issued or investment banks acting as intermediary, which is a less trodden path as initial public offers (IPOs) go.

“For us, going public has never really been about the pomp or the circumstance of it all. So you won’t see us ringing any bells or throwing any parties,” said Daniel Ek, Spotify’s founder and chief executive in an investor presentation last month. “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.”

The company's owners expect to collect around $1bn with the move and expect a negative impact between €35-40m costs from the move. Pre-IPO guidance from management pointed to guided to sales rising to between €4.9bn and €5.3bn this year, up 20-30% year-over-year. Although this is a slowdown from the 38% growth in 2017, Spotify expects losses to shrink and gross margins to improve.

Market analyst Neil Wilson at ETX Capital believes this might not be the best timing for Spotify to enter the market. "This could provide a welcome bit of positive buzz for the tech sector but probably comes at about the worst possible moment for sellers of stock. If you want to look at its model cousin, Netflix was down 5% on Monday and is c15% lower than where it was in early March.”

Looking at the the guidance for growing sales this year, Wilson wondered if Spotify can convince investors that it is able to turn a profit. "The guidance suggests a company growing fast but facing inherent, structural problems in its model that have stopped it from making a profit", he concluded.

Wilson believes that Spotify needs to improve margins to turn a profit and this requires paying less to record labels for the royalties of the content they stream.

"Spotify wants to be the Netflix of music – its whole model is based on scale and therefore it needs to see strong subscriber growth. Unlike Netflix, however, Spotify cannot produce original content – it relies on good relationships with music labels to deliver content to subscribers. Indeed nearly 90% of the music is supplied by just four big record labels.

"Critical to its success is not just subscriber growth, but improved margins. Management is confident it can do this but it requires the firm paying record labels less for content than they do now. This may be a significant stumbling block – the only way to improve margins is to pay labels less.

But the record firms have considerable bargaining power. "If Spotify is getting too profitable they can simply jack up royalty fees. They also own a fair chunk of Spotify equity. But this leverage cuts both ways – one of the reasons Spotify was able to renegotiate more favourable licensing terms last year was because labels did not want (for reasons relating to a complex convertible bond ) to see their shareholdings diluted. If the labels choose to sell their stock the outlook for licensing deals and margins changes."