For some time now, Spotify’s (SPOT) direct listing has been the talk of the town. While many confused the transaction as an IPO, the dynamics of this transaction were far different, which is one of the reasons that Spotify’s stock price has done nothing but fall since the opening bell on Tuesday, April 3rd when the stock hit the public market. Though it is worth mentioning that even with the declines, Spotify’s closing price on Tuesday came in 13% ahead of $132 per share reference price set by NYSE on the transaction.
Spotify’s Listing Structure Turned Off The Investors That Move The Needle
Spotify’s initial offering to the public was not an IPO, it was a direct listing. As such, the rules were very different. Under a traditional IPO, new shares are issued, the process is underwritten, and the investors that move the needle, the big banks, in some ways, regulate the price action on the stock.
With the unique nature of the Spotify direct listing, no one knew quite what to expect. However, many called for volatility. More importantly, some savvy experts pointed to the fact that the listing structure would turn the bigger investors off, which seems to be the case here.
The problem with a direct listing for the big investment banks of the world is the fact that they can’t get an upper hand. Ultimately, the big banks with the big investment dollars want to have some assurance of price range and the ability to purchase a massive amount of shares. In a direct listing transaction, they simply don’t get this assurance. In fact, this issue was best pointed out by John Fitzibbon, an IPO expert, in an interview with CNBC just before the direct listing. Here’s what Fitzibbon had to offer:
“No one has been down this road before… The real buyers are usually the institutions, and they want some control in terms of the amount they buy and the price range, and they’re not going to get that. The will want to buy X number of shares in a certain price range, and there is no guarantee they will be able to do that.”
Are More Declines Ahead?
Experts are starting to warn that the declines seen on Spotify thus far are just the tip of the iceberg. There are a few key issues that experts are pointing to when explaining why Spotify may be in for further declines:
- Institutional Investors – First and foremost, institutional investors are likely to continue to shy away from Spotify because of the reasons mentioned above. While there may be some institutional interest, unless there is a private offering that determines a price range and specific amount of shares, the larger investors aren’t likely to get involved.
- Spotify’s Losses Are Growing – In the prospectus for the direct listing, revenue grew by 45% in the period between 2015 and 2017. However, Spotify hasn’t been able to turn this revenue into profit. In fact, losses are growing at a faster rate than revenue with losses in 2017 nearly six times greater than losses in 2015.
- Competition – While spotify boasts about being what it believes to be the largest streaming music provider in the world, competition in the industry is stiff. While the company needs to figure out how to turn a profit, it also needs to keep prices low in order to maintain its competitive edge. This is a feat that may not be possible.