Spotify Direct Listing not an unequivocal success

Spotify Inc (SPOT) bucked the traditional IPO route and performed its ‘direct-listing IPO’ this week. Although IPO Boutique did not cover the Spotify (SPOT) offering (there were no subscription levels to report or give an advantage to our clients)…we did notice how some media outlets chose to call the listing a ‘success’ based on the opening trade vs. the NYSE reference price of $132.00.

It was not!

The actual price of the opening trade, $165.90, was immediately sold off as SPOT closed day one at $149.01. Making matters worse was the extremely lengthy process of getting the deal open — the longest since the Alibaba (BABA) deal in 2014. While SPOT sold off on day one…in its subsequent days it has begun to hold steady in the upper $140s area. Spotify’s valuation at $145 is roughly $27.75bn which would make the first week close a win from its last funding round which valued the company around $20bn.

A reason a direct listing could be “pulled off” by Spotify was the massive funds that were pre-existing investors that could help stabilize the stock. The positives that market makers at the NYSE did employ was the fact that they had reported BUYERS at different levels on the way down. When the stock shot below $140 on the first week…volume brought it back to a more stabile level. 

With that being said, there are a lot of new bag holders in the form of retail. Everyone who bought on day one of its IPO is currently in the red.

What we now see is a bloated private valuation be carried into the public markets by big money looking to protect their investment. In the short run, all is well. In the long term…it may all work out. But if growth stagnates, either on the revenue side or the user metric side, then the potential danger of unicorns’ that everyone is worried about could have a significant impact on the market.

We do think that Spotify was in a unique situation to pull this off and that there are very few private companies that could or would want to do something similar in the future. It is our opinion that notoriety amongst the general public and the deep pockets/corporate backers assisted this deal.

However, we do not expect many tech or for that matter companies of any sort- to follow in the footsteps of Spotify, and believe this was a unique set of circumstances.