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Home / Special Reports / Spotify to IPO Imminently

This report is not a personal recommendation and does not take into account your personal circumstances or appetite for risk.

25 March 2018

Spotify to IPO Imminently

In the first major IPO of 2018, Spotify, the world’s leading music streaming service, will list its shares on the New York Stock Exchange in an unusual offering.

This comprehensive report will answer some key questions ahead of the company’s debut, such as why now and its aims, as well as reviewing the current state of the global IPO market and how you can trade the latest listings with Accendo Markets.

What is Spotify and why is it listing?

Spotify is the world’s largest subscription-based music streaming service with 70 million paying customers, second only in total users to Soundcloud.

The company was founded by Sweden’s Daniel Ek in 2006 as an answer to the burgeoning issue of music piracy, with the service being fully launched in 2008.

Since then, Spotify has grown to boast 160m active users of its platform, and private funding valuing the company at around $19bn, but could become even greater than that after its New York listing.

Spotify is choosing to list now to allow current shareholders a chance to sell shares more easily than before, as well as making it possible for ordinary investors to bet on its growth.

It also removes the fortune of the company from resting solely in the hands of big Wall Street investors, following management’s mantra of offering services to all and not just to a select few.

Why is Spotify’s IPO so interesting?

Unusually for a company making a public listing, Spotify is not offering any new shares to investors.

Instead, the shares that will be traded on the New York Stock Exchange will be ones previously owned by shareholders, in what is known as a direct listing. On the day of Spotify’s IPO, current shareholders will offer shares to ordinary investors without restriction.

Furthermore, the company has not hired investment bankers to underwrite the shares and guide towards an opening price with institutional investors, saving almost $75m. While not the first company to do so, at $22.6bn, it will certainly be the largest to attempt it.

And why is it so important?

Should Spotify’s unusual listing prove successful, it might encourage other tech ‘unicorns’ – 200 or so privately-owned companies that are worth more than $1 billion – to pursue similar public offerings.

Many have stated their aversion to trading publicly when private financing is available. Spotify is choosing to gamble with public trading to improve liquidity for current shareholders.

How does it compare with other 2018 IPOs?

Spotify will be the biggest company to IPO in 2018 so far, kicking off what is hoped will be the biggest year for public listings since 2014. Already, US markets have seen their strongest start to a year ever, with $8bn being raised in January 2018 alone.

While 2017 saw the greatest number of UK IPOs since the financial crisis, and the greatest amount of proceeds, can an accelerating 2018 IPO market lead to both of these figures being beaten this year?

For more details on upcoming 2018 IPOs, and the key numbers and dates for the Spotify IPO, keep reading.

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2018’s UK IPOs so far

As mentioned above, January was the strongest start to a year on record for US IPOs as listings raised nearly $8bn. A total of 17 IPOs in the first month of the year was the highest number since 1996, before the dotcom boom around the turn of the century. While the UK may not have seen the rush of activity as across the Atlantic, however has already seen an array of multi-million pound IPOs take place in the first three months of the year.

IntegraFin, a financial services company and creator of the Transact wrap platform, was the first major London Stock Exchange float of the year and initially valued at £650m with shares worth 196p each. Debuting on 27 February, the company saw its shares trade at 250p, 28% higher than the IPO price, and has since seen the share price as high as 285p on 14 March. Although currently 6% from its highs, IntergraFin is now worth around £880m.

The largest listing of the year, however, belongs to Cablevision Holdings, a £1.95bn Argentinian technology hardware and equipment company. Also taking place in February, the shares have seen limited trading so far.

Also on the 2018 IPO list are JTC, a £330m institutional and private wealth management company which debuted in mid-March, and TruFin, a £210m AIM-listed alternative lender.

And major global IPOs still to come

 In the US, Dropbox is another tech unicorn testing the public markets in early 2018. The file hosting service founded in 2007 was once the most highly-valued tech company in the world whilst also being the first of the ‘deca-corns’ – private tech companies worth more than $10bn.

Although the company is now valued at the lower price tag of $8bn, this hasn’t hampered demand. Its IPO has been oversubscribed, leading to the offer price being increased ahead of its listing on the Nasdaq on 23 March.

Other tech unicorns such as AirBnB, the $30bn real estate rental company which turned its first profit in 2017, which also appointed its first independent board member last year, and Uber, the world’s largest car-hailing with a newly appointed CEO, fresh boardroom members and a wave of external investments valuing it at close to $50bn, may also choose to follow in the footsteps of Spotify should its unconventional listing be successful.

In the UK, luxury car maker Aston Martin has announced its intention to list publicly after announcing an £87m

full year pre-tax profit in 2017, its first annual profit since 2010 and after a £163m loss in 2016. Having always been cited as a pre-requisite for going public, the £5bn company’s first annual profit in seven years and record sales in the final quarter paves the way for it to explore an IPO in the second half of 2018.

Finally, while it was touted that the largest IPO ever to take place was happening this year, it seems as though the Saudi Aramco IPO will be put on hold until 2019. The eagerly anticipated flotation of 5% of the Saudi state-owned oil company would easily be the largest IPO in history, raising an estimated $75bn.

Keep reading for an in-depth history and description of Spotify since its 2008 inception, as well as an analysis of both the music streaming industry and potential rivals to Spotify’s market-leading position.

Page: 02

Spotify. Who, Where, What?

As mentioned earlier, Spotify is the world’s largest music streaming service. It operates on a ‘freemium’ service, where basic services of the company are offered to all users, although are subject to some restrictions, while customers can pay to get access to a premium service without adverts and with perks such as mobile and offline listening. Boasting over 160 million users, nearly half of which are paying customers with a subscription service, it pales in size only to Soundcloud, which boasts far fewer paying customers on a more juvenile app.

The Swedish company was spawned out of the idea that piracy was endangering the world of peer-to-peer music services, with founder Daniel Ek realising that the problem could only be solved by offering a better alternative. The company pays royalties to artists, its primary cost, to access the rights to the world’s most popular artists’ songs. The IPO will take place on Tuesday 3 April with Spotify shares trading under the ticker SPOT.

The company will release a full projection of its first-year finances on Monday 26 March, another unusual move for a company about to IPO as this sensitive information is usually withheld for institutional investors who would be the first entity to be offered the shares. It also took the ground-breaking decision to live-stream its investor day instead of hosting a private affair behind closed doors. It is hoped this transparency will increase the interest in the company from potential investors, also providing an indication of how the company wants to do business.

Perhaps most importantly for potential investors, however, is that the company is yet to turn a profit. It hopes that by listing publicly, drawing on ordinary investors and their hopes for the company’s growth, that it will soon be able to turn this around. It’s worth noting that it is not the only company yet to turn a profit to have listed.

Most recently, Snap floated despite being younger than Spotify and reporting a loss in its pre-IPO listing, while Dropbox, listing on the Nasdaq on 23 March, is also yet to turn a profit. Other companies with pre-IPO difficulties include Facebook, which had almost no mobile advertising revenues but now generates most of its money from these ads, and JD.com, the Chinese e-commerce company that made its first profit three years after its IPO.

It is targeting gross margins of 30-35%, a 10-15% improvement on the previous year and very ambitious given that the service pays royalties to artists. This would put it in line with other tech companies such as Netflix.

The music streaming market

While Spotify may be the number one music streaming service in the world, it is not without stiff competition from other start-ups, as well as some of the world’s largest tech companies attempting to enter the affray.

 Both Amazon and Apple offer music streaming services, however the two largest companies in the world both boast much smaller userbases than Spotify’s, despite their global reach.  Apple Music is the closest to Spotify in terms on users, with 40m, while Amazon Music claims just 16m, although both only offer paid subscriptions. Other start-up companies, such as rapper Jay-Z’s Tidal and US company Pandora, also offer rivalries to Spotify.

As mentioned above, music streaming services rely on paying royalties to artists on a per-stream basis. However, the value of these royalties is based on licensing negotiations, which are normally handled by record labels.

Over the page, we analyse why Spotify’s IPO is unusual, as well as asking if this creates a new blueprint for IPOs.

Page: 03

Why is this IPO different?

 As mentioned earlier, Spotify is taking a different approach to the standard IPO, not releasing any new shares to the public market while betting that potential investors won’t be put off by a direct listing of existing shares.

In fact, Spotify’s IPO is so unconventional it hasn’t hired a team of bankers to underwrite it, instead opting to pay only advisory fees to investment bankers for a paltry $30m. In comparison, Snap hired a total of seven banks, including Goldman Sachs, JP Morgan and Morgan Stanley, for a cost of $100m to underwrite its 2017 IPO.

Why can it do this? Because the company is directly listing existing shareholders’ shares, it needs only to make sure that there is demand for the shares at a price that the current shareholders are happy to sell at. This only requires a broker to analyse supply, demand and price on the day in order to keep any liquidity issues at bay.

Its shares won’t be subject to a traditional ‘lock up’ period in which initial institutional investors are obliged to hold shares for a given period. This was an evident issue for Snap, as many institutional investors, including some underwriters, chose to dump the stock after an unfavourable trading period following the company’s IPO.

There are, of course, still risks. Spotify’s management are hoping the unconventional listing will prove popular amongst public investors, although some are wary that a lack of institutional investment will hurt confidence.

Will this be the way forward from now on?

Depending on how well received the Spotify IPO is, it could inspire a range of other tech unicorns to follow suit.

Privately-held Tech unicorns, typically young companies, have found that raising money through rounds of private fundraising – also known as venture funding – has proved to be generally hassle-free and provides all of the benefits that a public listing would, without having to chance the wider world of public trading.

This has dampened the eagerness of many CEOs – who also tend to be the founders of these large tech companies – from risking a public listing which would allow investors from outside of their established relationships and funding bases to hold sway over their company. This has been cited as a reason that founders of both Uber and AirBnB have been dissuaded from going public at an earlier date, especially after Snap’s 2017 IPO saw initial gains post-IPO give way to significant selling, which accelerated after the ‘lock-up’ period ended.

A successful listing for Spotify, however, could change the tune of unicorn CEOs. By proving that they can indeed list on public markets without having their businesses altered by outsiders and, most importantly, raising a greater amount of money than possible through private contributions, it could inspire a new age of IPOs.

There are 200 or so unicorns all eagerly watching the performance of Spotify’s IPO. The structure of the IPO could offer an attractive alternative to CEOs unwilling to risk turning their ‘brain-child’s into financial entities.

For examples of how you can trade the shares of a company following a public offering, a breakdown of IPO trading options, and how Accendo Markets can help you capitalise on these opportunities, turn the page.

Page: 04

Pricing

Whilst during a normal IPO, the price of shares is estimated in a range that is then narrowed as demand becomes apparent, during Spotify’s listing, designated market makers on the New York Stock Exchange will build order books to match buyers and sellers, then setting an initial price once the first trade is processed on 3 April.

How can you trade this IPO?

Not all IPOs are open to the public initially, with the purchase of shares at the official IPO offer price often reserved only for the largest financial institutions. However, due to the unusual nature of Spotify’s IPO, you can be directly involved on the day of the company’s stock market listing along with the rest of the world.

Once shares begin trading on the New York Stock Exchange, they will also be available to trade on Accendo Markets’ platform. Furthermore, as Spotify’s listing is not a conventional IPO, there is no conditional trading. This means that shares can also be shorted from the point of their first trade onwards.

What are your options?

As Spotify’s shares will list directly on the New York Stock Exchange, you’ll be able to trade them with Accendo Markets using CFDs from the opening trade on April 3 onwards. To save on costs and capital, CFDs are an alternative trading option that allows you to go long or short on shares, paying no stamp duty with a deposit of as little as 5% required, although note that newly listed shares such as Spotify tend to carry a 10% CFD margin.

Going long is for those that see growth potential in the company, or who expect demand from investors who missed the initial listing pushing the price higher in the future. They also believe that growth could lead to inclusion on a major index, such as the S&P 500, which could be a driver, while the promise of dividends in the future may also be attractive. Our traders can help you assess potential drivers to make an informed decision.

On the other hand, if you missed the chance to make a quick profit on the initial reaction as the shares traded for the first time, and believe there to be too much hype surrounding the IPO – overvaluing the shares ­– you could also use CFDs to short-sell shares, affording you the potential to profit from a decline in the share price.

Why trade the IPO with Accendo Markets?

The largest of global IPOs tend to be heavily traded, with significant trading activity for weeks after the listing day. To stay on top of the share price moves and ahead of other investors, having a trusted broker to keep you in the loop pays dividends. If major news is announced when will you find out? That same day? The next?

The benefits of working with Accendo Markets speak for themselves: A dedicated trader will call you with accurate information in-time and on-time, not just some time, to make sure you are able to participate in and react to the world’s biggest IPOs in a cost-effective manner.

To find out how Accendo Markets can help you trade IPOs, contact our trading floor on 020 3051 7461 or [email protected] to speak directly to one of our traders. Alternatively, you can sign up to have the research department’s award-winning content delivered directly to your inbox.

Page: 05

Want to take advantage of the above opportunities right now?

Whether you see UK stocks going up or down for the remainder of the year, tradable opportunities will arise regularly. We’re here to help you weed them out and capitalise on them. Accendo Markets can help you increase your profit potential with the use of leveraged instruments such as CFDs, a flexible alternative to traditional shares that is currently exempt from UK stamp duty.

CFDs: Like shares, but more flexible

While 233 shares in Spotify @ $60.27 could require an outlay of around £10,000 plus commission, the same exposure via a CFD would require about £500 plus commission (see right-hand box; margin + costs). If a trader invests in Spotify, one would assume they believe the share price is likely to move in their favour. After considering the ‘worst case scenario’ and assigning funds to cover it, the trader may conclude there’s little point in exposing the full £10,000 to Spotify shares - some of that capital could be put to good use elsewhere in the markets. (Source: CMC Markets; all prices above are indicative)

CFDs are leveraged instruments, but you don’t have to use leverage

 If you had, say, £10,000 to invest in the stock market, you could deposit that amount into a share dealing account and purchase shares in a company. You would pay commission to open the position, 0.5% in stamp duty and the full £10,000 will be tied up in your chosen shares with any profit or loss based on that exposure. The same £10,000 worth of exposure can be secured with a CFD for a fraction of the initial outlay thanks to leverage, with the risk and reward the same as if £10,000 worth of traditional shares were held. But should you not be interested in leverage, you can always treat CFDs like shares. Simply deposit £10,000 into a CFD trading account and take the equivalent CFD position which will tie up as little as 3%/£300 (note that overnight financing costs will still apply). The remaining £9,700 is not tied up, so you can use some of that to take advantage of another short-term opportunity elsewhere, or simply leave it on the account to support any losses. Best of all, using a CFD means you pay no stamp duty!

What’s your view?

 Think shares will rise? Take a long position by buying CFDs (buy low, aiming to sell high). Think they’ll fall? Take a short position by selling CFDs (sell high, aiming to buy low). For a more detailed rundown of CFDs, their mechanics, associated costs and some trading scenarios download our ‘Comprehensive Guide to CFDs’ here.

Page: 06

The Accendo Markets Research Offering

Does your current broker’s morning report tell you all you need to know about yesterday’s news? If so, how is it offering you anything more than the plethora of information already available on the internet?

We’re proud that our morning editorial has become a hot commodity in the City, its content quoted daily by the journalists that are writing the news everyone else will be reading later in the day, if not the next. Our morning report tells you what’s driving the market at that moment and what to look out for in the day ahead.

If a company has reported earnings before the market opens, we’ll tell you why the shares are called to open up or down in relation to that announcement.

As well as the Morning Report, signing-up to Accendo Markets Research & Trade Ideas offers you the chance to receive the following publications:

  • Another Level: A selection of key level alerts on various stocks.
  • Index Focus: A selection of key level alerts on the major indices.
  • Trade Alerts: Trading ideas from our analysts. What do they think is likely to move?
  • Macro Calendar: Live market-moving data, breaking news as it happens
  • Week in Advance: A summary of next week’s key events. Is there a trading opportunity there for you?

To ensure you can act as quickly as possible, you’ll receive an email with a link to the latest publication as soon as it’s released. You can unsubscribe from these emails at any time.

Based on a wealth of experience, gained from both large and small institutions, our Research and Trade Ideas are produced in-house. Our team of dedicated professionals comprises both analysts and traders, drawing upon a wide range of resources and methodologies.

Our aim is to provide you with the manpower and expertise you need to help you clarify, interpret and capitalise on the ever-growing volume of market information.

The journalists don’t pay for it and neither do you, so why not give it a go? You’ve nothing to lose and perhaps a little more to gain…

Page: 07

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Page: 08

This research is produced by Accendo Markets Limited. Research produced and disseminated by Accendo Markets is classified as non-independent research, and is therefore a marketing communication. This investment research has not been prepared in accordance with legal requirements designed to promote its independence and it is not subject to the prohibition on dealing ahead of the dissemination of investment research. This research does not constitute a personal recommendation or offer to enter into a transaction or an investment, and is produced and distributed for information purposes only.

Accendo Markets considers opinions and information contained within the research to be valid when published, and gives no warranty as to the investments referred to in this material. The income from the investments referred to may go down as well as up, and investors may realise losses on investments. The past performance of a particular investment is not necessarily a guide to its future performance. Prepared by Michael van Dulken, Head of Research

Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% of retail investor accounts lose money when spread betting and/or trading CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
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