Spotify Technology (NYSE: SPOT) had a strong first day as a publicly traded company, gaining more than 12 percent on Tuesday from its reference price, although it finished lower than its highs for the day. While enthusiasm for Spotify is strong on its debut date, some investors are skeptical of the company’s long-term business model.
Spotify’s most recent reported valuation is $19 billion, making it the largest company to go public since Snapchat parent company Snap ( SNAP) roughly a year ago. However, Spotify’s debut on the public markets is a bit unusual. In fact, it’s not technically an IPO because no new shares are being offered. Instead, Spotify is simply transitioning its current private shares to the New York Stock Exchange, and management has said the company was not aiming for a big pop in share price on day one.
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Spotify reported $4.99 billion in revenue in 2017, up 39 percent year-over-year. Gross margins also grew from 14 percent to 21 percent last year. Spotify recently reported 157 million monthly active users, 71 million of which are paid subscribers. Apple ( AAPL) is Spotify’s largest streaming music competitor, but Apple Music recently reported just 38 million subscribers.
“Very high global aided brand awareness, relatively high customer satisfaction scores and superior data-driven personalization all combine to help Spotify maintain its leadership position,” RBC Capital analyst Mark Mahaney said last week. RBC estimates the global streaming music business is valued at about $125 billion, leaving plenty of room for Spotify to grow.
However, skeptics see several red flags with Spotify. While revenue grew 39 percent in 2017, losses more than doubled from $662 million to $1.5 billion last year. In addition, Apple Music’s 5 percent monthly subscriber growth rate is currently much higher than Spotify’s 2 percent growth rate.
Loup Ventures analyst Gene Munster says it’s telling that Spotify cannot turn a profit even as a well-established streaming music leader.
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“It’s hard to see how they will make money,” Munster says.
To make matters worse for early investors, big public tech debuts have historically struggled in their first year on the market. Eight of the 10 largest technology IPOs plummeted between 25 percent and 71 percent in the year following their IPO date. In 2017, four of the five largest U.S. IPOs finished the year down at least 11 percent from their debut prices.
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Spotify Technology (SPOT) Stock Has a Lot to Prove originally appeared on usnews.com
