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I’ll admit it … I’m one of those people who sings a little too loud (and a little out of range) when I have my headphones on. Especially if Journey’s “Don’t Stop Believin ‘” lights up.

I can’t help myself, the music moves me … much to the chagrin of anyone within listening range.

In fact, most of my iPhone memory is devoted to my playlists. Before I upgraded my storage recently, I actually had to delete photos in order to keep all that music ready to explode at the touch of my finger.

Now I have plenty of room … but there is a problem.

I’ve been known to shell out over $ 20 a month to buy Apple songs. I know, it’s completely unnecessary with today’s streaming technology. But I was stuck in my ways.

So recently, I got “unchecked” … and joined the popular Swedish-born direct listening service, Spotify. And I never go back.

So when Spotify – valued at around $ 20 billion – announced its IPO with a March / April stock offering in a unique way, I woke up. I started scouring the headlines, and already analysts are calling it the biggest tech IPO of 2018. The anticipation is huge!

But, alas, I am cynical at heart. Despite my excitement, I had to ask myself … is the hype for the Spotify action really worth it? So today, let’s take a detailed look at this IPO to find out.

Talkin ‘Bout a Music Revolution

In my mind, Spotify has been among the most significant innovation in music since perhaps Kurt Cobain discovered heart-wrenching comments and raw, foul-smelling lyrics about teenage angst.

The concept is simple: you stream music over the Internet. Free. Or, at most, a small monthly fee of $ 9.99. You just need the Spotify app to access everything.

When Spotify launched in October 2008, it was a revolutionary and groundbreaking idea. This is why the company has helped pioneer the music streaming market, paving the way for services like Apple Music (Apple’s streaming service, which went live much later in 2015).

Spotify is an endless and user-friendly treasure chest.

You listen to what you want, where you want, when you want. The app is compatible with pretty much every device I can think of, from computers to smartphones to tablets.

And if all that music sounds overwhelming, don’t worry, you can also use its unique music discovery feature to find songs that match your musical taste.

The whole platform is a great idea.

Unfortunately, investors like us were unable to participate in this revolutionary service as the company was privately held for the past decade. So now that we can soon participate in the stock, we need to make sure that the investment is worth it.

The Times, they’re changing for a $ 1.8 trillion industry

The first thing to note is that, according to PwC, the global entertainment industry is expected to grow from $ 1.8 trillion in 2016 to $ 2.2 trillion by 2021. That’s good, but it’s a rate annual compound growth of 4.2%, compared to 4.4% forecast achieved in 2016.

This means that the old-fashioned entertainment industry is starting to stabilize. To solve this problem, the industry must focus on building lasting relationships with its customers.

After all, consumers are king. When it comes to recordings – movies, television, music – we can dictate what we want to see, hear and experience. We vote with our time, attention, and a small subscription (think Netflix, Amazon Video, and Hulu).

Just like industries and products such as healthcare, cars, refrigerators, thermostats, etc. needed a revolution – see precision medicine and the Internet of Things – so did entertainment.

And this revolution is here. Spotify is just one of the big players.

That’s why Spotify has around 140 million active listeners, and 70 million of them pay extra fees for advanced features. Best of all, the service has 30 million songs and adds more than 20,000 per day.

It also offers over 2 billion playlists, generated by the company’s growing user base (a great idea that engages the customer much more directly), and an additional 5 million playlists are created or edited daily. .

This is obviously a huge reach. However, there is a problem …

The problem: money, money, money

Despite all this, Spotify has not found a way to be profitable.

Yes, sales jumped 52% to $ 3.09 billion in 2016. But the net loss more than doubled to $ 568 million. (Although the adjusted net loss is more like $ 310 million.)

For example, about $ 2.62 billion of that revenue evaporated with the cost of goods sold. An additional $ 440 million disappeared in sales and marketing expenses etc.

At least, earnings before interest, taxes, depreciation and amortization were $ 169.2 million in 2016, up from $ 180 million the year before, Billboard calculated.

But we need to see the business generate positive revenue.

Spotify is not. So the numbers made me raise my eyebrows. With that in mind, I turned to Paul Mampilly for his opinion on Spotify’s public list.

Paul Mampilly talks about Spotify Stock

Paul is our go-to point of contact for all things disruptive technology, so I knew he had to have some interesting thoughts on this. This is what he told me:

Spotify’s public listing is interesting from two angles: First, it’s a non-traditional IPO because it took Wall Street out of pricing. Instead of making the shares available to the general public, Spotify will go public directly. This means that only institutional investors have access to it – eliminating the need for banks to set an initial price, link sellers and buyers, etc. This is something that makes initial trading a wild card as Wall Street involvement provides price stabilization for IPOs.

Second, Spotify is still losing money despite having a huge subscriber base. However, it’s also a subscription business, which means recurring revenue – and it’s a great model. Also, like Netflix, it is a global business, so it can continue to grow.

So, the biggest worry for Spotify is, are enough people going to buy the IPO that you want to be in on day one? Because most of the time you have the option to buy it lower. This is because most people play IPOs for a quick pop on the first day or week and then empty it.

I’m saying that people who want to buy stocks as an investment should bide their time, wait to see how stocks trade – and see how Spotify’s business performs over a few quarters. Then you can build your position over time if things look good.

Overall, Spotify is an amazing product with a great model. This can ultimately lead to profitability down the road. But it is a “wait and see”. Don’t get caught up in all the hype just yet!

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Source by Jessica Cohn-Kleinberg