This year’s IPO market is widely anticipated to be the year of the unicorn IPO market. Snapchat, AirBnB, Spotify, Dropbox and even Uber are rumored to be considering an IPO this year.
A few potential investors at Graphene asked me to analyze the merits of participating in a Spotify IPO. At an $8.5B valuation, Spotify’s near and long-term performance are bellwethers for other unicorns.
I share the insights below as a way for readers to understand my logic in analyzing late-stage investing and to engage with me. Your thoughts are welcome here or via Twitter (@giannikoulis)
To Buy or Not to Buy?
Based on Spotify’s current traction and its current valuation:
Spotify is a short-term hold opportunity with moderate risk-adjusted returns.
Investors have a potential return of 25% within 2-years but with downside loss exposure of 33%
Spotify’s got upside
Though the music industry’s revenues have been decimated since the dawn of the internet era, digital revenues contribute ~25% of its revenues and are growing. In the music streaming space, Spotify, the 11-year old Swedish pioneer, leads the pack.
If you’re bullish on Spotify, it’s probably because:
1. Spotify has scale & commands the attention of the music industry
With 40M paid users, 100M free users and revenues at $2.2 B, Spotify is far and above the leader in music streaming.
Be careful, Spotify’s downside is daunting
If you’re concerned about Spotify’s future, it’s probably because:
1. Path to profitability is uncertain
Paying nearly 85% to record labels means Spotify’s destiny is controlled by the record labels. A meaningful drop in COGS/ royalties is unlikely and Spotify has limited other means to reach profitability.
The competition has been challenged to grow. Pandora’s users plateaued at 80M for past 3 years.
Even Jay-Z’s Tidal and Apple Music’s brand recognition and distribution weight have not demonstrated massive growth. And who remembers Microsoft’s Zune and Groove?
Overall, Spotify’s lead in the music streaming industry presents a near-term return for investors. However, maintaining that lead is still precarious.