As Spotify begins trading, a mixed bag for recent tech IPOs

Spotify can eschew a traditional IPO because it does not require fresh capital and is a popular consumer brand about which the investors do not need educating through a road show. REUTERS  Christian Hartmann

Analysts are anxious that will be more hard for Spotify to do because it is primarily negotiating for the same music streaming rights as Apple, Google and Amazon - companies that can afford to pay even more, if they want.

Global recorded music industry revenue in 2014 had fallen by 40 percent to $14.3 billion from $23.8 billion in 1999, when the rise of music file-sharing service Napster ravaged sales of CDs.

The direct listing also meant the company listed without underwriters, a set price, a set supply of shares, or a lock-up on existing investors.

Last year, Spotify shares were traded privately between $37.50 and $125, the company said in its F-1 filing.

It now has 71 million so-called premium subscribers, including users who have given the company a credit card number for a free trial. Interestingly enough, the NYSE set Spotify's reference price at $132, a figure which has the potential to fluctuate quite a bit once shares finally begin trading and buy and sell orders are aligned.

A $10,000 investment in Netflix's 2002 initial public stock offering would now be worth more than $2.6 million, leaving some investors wondering if Spotify might be on a similar trajectory in music streaming.

Spotify chose the direct listing method in part to ensure that employees and longtime shareholders could sell stock on day one if they choose.

Cresset Wealth Advisors' Jack Ablin on the state of the markets and Spotify going public at the NYSE.

"Officially we are not even calling it an IPO", says Matt Kennedy, an analyst at Renaissance Capital, which manages IPO-focused exchange-traded funds. Instead of paying more than $65 million in fees to Wall Street investment banks, Spotify will likely pay half as much, market analysts said. The decision to direct list the stock instead of performing an IPO came as a surprise to many in the finance sector and could signal a new era of Wall Street reform. Instead, it is selling shares now help by its private investors and although this may save them some money, it ultimately makes the entire process volatile.

The music streaming firm is taking a very unusual route with its initial public offering through a direct listing on the stock exchange, which is why trading will be starting later in the day rather than first thing in the morning. This is because in its 12 years of existence, the company costs are far greater than its revenues and as much as that gap is narrowing, there is no assurance that Spotify can become truly profitable. It is also not known at what price the stock will start trading Tuesday.

"If the stock is choppy when it takes off the stabilization agent attempts to create a floor of where the stock price could go", said Lise Buyer, an IPO consultant with Class V Group in Silicon Valley.

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