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Is Spotify Really Worth $20 Billion?

Spotify

So the music industry isn’t dead, after all, and streaming is definitively the future.

At least, that’s the sentiment that comes from Spotify’s move Wednesday to list its shares directly on the NYSE, sparking talk of a possible $23 billion-valuation thanks in part to new deals with three major record labels.

Spotify filed to go public directly, not through an IPO, which means it’s listing shares directly on the NYSE under SPOT. It’s unconventional, but it avoids hefty IPO costs, which would have run in the neighborhood of $300 million.

But its potential valuation leaves everyone guessing. This year, Spotify sold its shares for $132 in private transactions, compared to last year’s range of $37.50 to $125 each. If we stick within this range to calculate valuation based on stock price and outstanding shares, we get anything from $6.3 billion to over $23 billion.

If Spotify were to hit a $23-billion valuation, it would hold a significant claim to fame as the biggest tech company to go public since 2012.

There’s a cautionary valuation tale here, though. Remember SNAP? It has a massive valuation on its debut, too—try a $30-billion market capitalization on for size. But it was also bigger than reality, and the hype couldn’t keep it there.

A $23-billion valuation would be a huge accomplishment for Spotify--a company that lost $1.5 billion last year.

Spotify started offering is music streaming service in 2008, and now has almost 160 million monthly active users. Globally, it boasts 71 billion paid subscribers.

But it hasn’t been easy making money in the music streaming business. In 2017, it recorded revenue of almost $5 billion, but posted a loss of $1.5 billion. True, much of that loss was due to a transaction deal with Chinese tech giant Tencent that won’t happen again. But operating losses in 2017 were $461.3 million. The year before, they were $425.9 million.

While it’s not profitable—yet—things appear to be looking up. The company says that paid subscribers are growing at 46 percent year-over-year, and monthly active users are growing at 29 percent year-over-year. Related: Who Will Win The 5G Race?

But the big news is the reworking of crucial contracts with three major record labels. These new contracts are immensely improving the bottom line. As Bloomberg points out, whereas Spotify was paying 88 cents on every dollar it earned in fees to the record labels in 2015, plus other expenses, with the contract rewrites last year, it’s now paying 79 cents.

All in all, everyone should be surprised that Spotify has gotten this far. After all, it started off as a completely off-the-radar Swedish company. Then, suddenly, it’s struck deals with major record labels. Now it’s going public, and we wouldn’t be further surprised if it did well--but watch out for tricky valuation because shareholders like to value things higher than public markets.

And the competition will have its claws out at this point: Apple Music, for one. It’s got some 36 million subscribers but doesn’t offer Spotify’s free tier supported by advertising. Apple Music also doesn’t hold an important claim to fame that is reserved largely for Spotify, which is credited with helping turn the entire recorded music industry around by giving money back to the artists.

In other words, the music industry isn’t dead, and it should be thanking Spotify for its life-support. Whether the public market will thank it as well, we’ll start to see in March when its shares become available.

By Jan Bauer for Safehaven.com

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