Over the last few years, the technology sector has been outperforming the broader market by some distance, with the benchmark containing a great deal of companies who are long term structural beneficiaries. Always partial to a good acronym, investors have devised “FAANG” to describe US tech’s best and brightest; Facebook, Apple, Amazon, Netflix and Google (now Alphabet).
Although Silicon Valley is the spiritual home of the technology industry, Europe finally seems to be taking a bite out California’s dominance. Spotify, Sweden’s music behemoth listed itself on the New York Stock Exchange after Easter, to the tune of roughly $19bn.
To list is reported to have cost the Stockholm streaming service up to €40m, around half the price of the last app based firm to do so, Snapchat. Instead of taking the traditional route to public ownership, controlled and conducted by pricey investment banks, Spotify has gone straight to market without any of their shares being underwritten to stabilise the price. This action also frees existing owners from any lockup period that would have otherwise restricted them from selling their shares following the listing. Although it could be a volatile time whilst the market finds a fair price for the stock, their “alternative IPO” is a clever move. It plants the idea that the company is so solidly capitalised that it doesn’t need the money from going to market. The ploy seemed to work perfectly with the stock rising 26% in the first hours of it being freely traded.
With the genesis of Napster and illegal downloading blighting the music industry, the growing popularity of paid music streaming has revived an industry that once seemed on its knees. Spotify now boasts 71 million premium and 159 million casual monthly users, twice as many as its nearest competitor Apple. Top end margins look set to increase throughout 2018 coupled with narrowing operating losses, the offering could be music to investor’s ears.
Spotify Sinks Teeth Into FAANG first appeared in the Cumberland Place Newsletter for April 2018. Click here to view a PDF version.