April 12, 2017 by tradersnote
With the matter of the Spotify IPO again being under consideration, it is almost inevitable that questions are being asked about the current profitability of the business. The mood among investors seems to have changed considerably the period after 2015. Then the pricing of IPOs of businesses of this sort was based on the size of the user base and the business model offered. More lately matters of profitability have been given more importance and this is not grounds for congratulations among those who are wishing to see a Spotify IPO occur in the near future. Spotify, the Stockholm-based music streaming service has well over a 100 million customers on its platform and it has plans for further expanding its fee-based services which might on the face of it look attractive. But set against these promising factors is the matter of profitability. The most recent figures available, those for 2015, showed the company running at a loss of $194 million with revenue of %2.8 billion. Why is this the case and what effects will it have on the IPO?
The question about the profitability of the Spotify IPO is complicated by the fact that Spotify has never been an entirely free service. Although customers have been able to use it to stream music for free since its founding in 2007, this free service has always come with ads, which of course generate revenue for Spotify; there has also always been a pay-per-month service available which provides streaming free from ads. By the end of 2016, Spotify had 50 million paying customers, that is over half of its customer base, but even so, the concern was still running at a loss. Why is this the case? It seems that at the moment the figures simply do not add up in a way that makes Spotify profitable. The company is well aware of this and is seeking to improve its financial position in advance of any Spotify IPO since the company would not at all benefit from an underpriced IPO.
Considering the future of the Spotify IPO necessitates looking at some of the measures mentioned above. Spotify is looking, for instance, to introduce its HI-Fi service. For an additional fee customers will enjoy the benefits that come as more and more customers abandon jacks in favour of such wireless headphones as Bluetooth and Lightning. Analysts believe that the demand wireless and loss-free apps will increase and Spotify’s new app could take a place as a provider for this market, improving the company’s average revenue per user, margins and overall profitability in the long run. Set against this hopeful sign for both the Spotify IPO and the company’s profitability is Spotify’s debt problem, with large loans and stringent premiums expected, premiums which will become only less advantageous the longer the IPO is delayed. It is clear from considering all these factors that there are very real current problems with the profitability of Spotify. How long the IPO will remain delayed remains to be seen.
(Simon Topliss, Research Analyst)
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