How Much Money Is Spotify Actually Worth?

Spotify is launching its IPO on Tuesday, April 3. And while the statement has some glimmer of truth to it, that’s not exactly the case. In fact, the transaction that Spotify is launching on Tuesday isn’t an IPO at all, it’s actually known as a direct listing.

The reality is that there are some very key differences between an IPO and a direct listing. Since this is one of the most anticipated listings of the year, most folks in the investing space are already of the basic distinctions between a direct listing and an IPO. For those less keyed in, the biggest differences are that there won’t be any road shows, new shares will not be issued, there will be no underwriter. That, generally, is your standard direct listing.

However, one of the key effects of direct listings has to do with valuation. When a company launches an IPO, they set a price for the IPO, giving us a clear idea of what the company believes the shares are worth. By looking at the valuation of the IPO, investors have something to go off of with regard to the actual value of the company. However, that’s not the case with Spotify. Ultimately, there is no pre-transaction market cap. Because of that, any figures on what the company is actually worth on the market is nothing more than outside speculation.

Breaking Down The Potential Value Of Spotify

With no IPO price range, it’s difficult to get an idea of what Spotify will actually be worth, and the estimates are wide ranging. Ultimately, the price of Spotify stock will be set just before the launch of the direct listing and will depend on the investor interest around the direct listing. Ultimately, this price will depend on the amount of shares that current shareholders will be willing to sell and the demand for these shares. This of course means there is no set price as of yet.

However, there are a couple of things that are public that can provide indications as to the potential value of the shares:

1. Prices Of Privately Traded Shares - In the SEC filing for the direct listing transaction, Spotify announced the cash value of privately traded shares in the beginning of 2018. According to the filing, from January 1st through March 9th, shares traded privately at prices ranging from $48.93 to $132.50. While that is an incredibly wide range, this is a good starting point for assessing the direct listing value of Spotify.
2. Analyst Opinions - It’s also important to look at what analysts are saying with regard to the value of the company. At the moment, many analysts are bullish. One firm, RBC Capital Markets, has suggested that spotify could be worth around $43.5 billion. The analyst, Mark Mahaney set a price target on SPOT shares at $220.

There Is One Big Concern

While opinions surrounding the Spotify direct listing are generally bullish, there is another risk that some might overlook. Due to the nature of a direct listing, there will likely be less institutional interest. At the end of the day, the structure of this transaction will limit big money investors from being able to purchase large blocks of shares at a predetermined price range. As a result, that also means diminished liquidity compared to that of an IPO and a wider spread between high and low buy and sell prices. All of this could hinder the immediate demand for the stock, leading to a less successful transaction than expected.

The Bottom Line

The bottom line here is that no one really knows what the price of Spotify will be, nor how the direct listing will go. While direct listings have happened in the past, there has never been one quite like this. While there are some people speculating weal or woe, it's nothing more than a guess informed as much by the facts as by personal bias. In any case, Tuesday's listing could be an exciting day for the market. It will definitely be a roller-coaster for Spotify investors.