Spotify and Dropbox Go publicJune 19, 2018
Recently, Dropbox and Spotify officially went public offering local as well as investors involved in international share trading some stake in the companies. In this article, we’ll examine the two companies separately.
Dropbox offers cloud storage services to its customers, raking in over $1B in 2017 with over 500 million users. The company went public via an IPO that listed the stock at an opening price of $21. The company was expected to be originally listed at a price ranging from $16 – $18 but the high demand from institutional investors raised the price. The company has since traded at a price ranging between $29 and $33 yielding a 38% on its lower end.
However, the company recorded a $100 million loss in 2017. However, the losses aren’t growing and the company has a strong customer base. Furthermore, since the company took the conventional route of an IPO, all risks associated with direct listings are averted.
With this, the company stock is poised to perform well into the future.
Spotify is a digital music service that gives users access to millions of songs, podcasts and videos from artists all over the world. This music streaming giant had 159 million monthly active users by the end of 2017 with 71 million of these being paying subscribers. The company claims 41% of the US market share. Surprisingly, the company made a $1.5 billion loss for 2017, up from $662 million in 2016. This is despite the fact that the company saw an increase in revenue of 38% to an astonishing $5 billion dollars.
The company went public in a rather unique way. Rather than offering an Initial Public Offering (IPO) Spotify opted going public via a direct listing on the New York Stock Exchange (NYSE). To understand the implication of this, we need to understand the mechanisms of IPO’s and direct listings.
Direct Listing v IPO
A direct listing is a very specific way in which a company can take itself public. Rather than hire a bank to initiate the process, issuing new shares and finally going through the elaborate IPO process, the company simply begins trading on a publicly listed and it only sells existing shares. This is increasingly attractive to start ups that have raised vast amounts of funds in the private market and so they don’t need more money as such. Furthermore, such firms have already established their brands. Thus, an IPO would yield large fees for benefits they don’t need. This method is typically used to provide liquidity for the firm’s existing shareholders.
In a normal IPO, a company’s CFO along with the management team works with an investment bank to create a narrative outlining how many shares the company is going to sell as well lining up long – term institutional shareholders who will buy shares once the IPO happens. This process is absent in a direct listing and the company will not be raising any new funds.
Of particular note is the risks that come with a direct listing. The lack of involvement of the banks implies that there’s no party ascertaining the stability of the stock (making sure the stock remains level). Furthermore, there won’t be any long – term shareholders ensuring the smoothing out of the stock on its initial day of trading and so ensuring that the IPO launches with a healthy increase in share price. This implies a high volatility in the stock on its first day of trade. Lastly, such a listing may result in low liquidity since only shares held by existing shareholders are sold.
Spotify was publicly listed at a share price of $132 and closed the day 13% up to $149.01. Since then the price has oscillated between $160 and $150. This is generally successful for a direct listing. However, some analysts have theorized that the low supply of stocks may have led to the ballooning of the price.
As previously stated, the company is currently making losses. Furthermore, the company doesn’t offer a service that may be described as unique as YouTube, Apple and Tidal offer similar services. The company cannot afford to increase its subscription fees either as this may reduce its paying subscriber base. The stock has been performing well so far but its current poor performance in earnings may be a red flag.