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Breaking Down Spotify Post-Direct Listing

By all accounts, Spotify’s Direct Listing and uplisting to the NYSE was pretty positive. While the New York Stock Exchange set the reference price for the stock at $132.00 per share, the stock opened at a price of $165.90 per share, giving the company a market cap of $29.5 billion. Of course, the price didn’t stay that high, but after closing the session at $149.01, the value of the stock stayed around 13% above the reference price.

Data That Could Drive Spotify Higher

There’s a good reason that Spotify’s Direct listing was so popular. The company is a massive one. In fact, according to the prospectus surrounding the direct listing, they are the largest streaming service in the world, and when it comes to users, they have plenty of them. Below are some of factors that could potentially lead to gains Spotify shares:

  • User Data – In their prospectus, Spotify boasted about being the largest streaming music service online today, and they weren’t lying. At the moment, Spotify has around 157 million monthly users. Of these 157 million users, about 71 million of them are paying subscribers. This massive book of customers generates strong revenue for the company regularly. Not to mention that user growth has been climbing. In fact, from the end of the year 2016 to the end of the year 2017, subscribers paying for premium spotify services climbed from just 48 million to the 71 million figure mentioned above.
  • Revenue Growth – When it comes to revenue, Spotify has seen some pretty substantial growth. In fact, from the year 2015 to the year 2017, the company generated growth in revenue in the amount of 45%.
  • Growth In Asia – Also, Spotify recently launched in Japan, Indonesia, and Thailand. As a result, there are expectations that growth will be strong in Asia. Also, the company is currently working on launching its services in India, Russia, and most of Africa.
  • Revenue From All Users – Finally, Spotify has built a business model that allows it to earn revenue from every one of its users, not just paying subscribers. While paying subscribers generate revenue for the company through subscription fees, free users generate revenue for the company through advertising.

Data That Could Drive Spotify Lower

While there are plenty of reasons to be excited about Spotify’s stock, there are also plenty of risks to consider if you’re thinking about investing. Here are the primary risks that Spotify investors will contend with:

  • Slowing Growth – As mentioned above, Spotify saw some pretty impressive growth with only 48 million paying subscribers at the end of 2016 and 71 million paying subscribers in 2018. However, the company’s own prospectus shows that it is expecting for subscriber growth to slow quite a bit. In fact, by the end of the year 2018, the company is only expecting to have around 90 million paying subscribers. That means that while the company saw nearly 48% in year over year growth in users in 2017, it is expecting for that number to fall to around 27%; nearly cutting the subscriber growth rate in half!
  • Increasing Losses – Another major factor to consider here is the fact that the company is not profitable and may never be. In fact, while revenue grew 45% from 2015 to 2017, in that same period, losses grew nearly six fold! So, it seems as though as the company increases revenue, losses are growing on a compounding basis, meaning more revenue only makes more losses.

The Bottom Line

At the moment, making a decision to invest in Spotify could prove to be a very risky decision. While the company is a household name, that doesn’t necessarily mean it’s a good investment. Considering massive red flags like slowing growth and increasing losses, Spotify could continue to see declines.

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