Spotify is causing a stir in Silicon Valley and on Wall Street.
The London-based music streaming service filed confidential IPO paperwork with the Securities and Exchange Commission at the end of December, sources told Axios on Jan. 3.
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While the company is said to be pursuing a direct listing on the NYSE in the first half of 2018, it has still enlisted the help of Goldman Sachs (NYSE: GS), Morgan Stanley (NYSE: MS), and Allen & Co. as advisors. A direct listing is different, and crucially, less expensive than a traditional IPO because it means the company can skip the typical IPO roadshow process.
So if Spotify lists its shares in the next couple of months, what will its valuation be? Let's take a closer look.
Spotify funding rounds
Spotify started in Sweden in 2006 when founders Daniel Ek and Martin Lorentzon were brainstorming business ideas and realized it was difficult to get the music they wanted on Napster despite the company being six years old.
The entrepreneurs got their first cash injection about two years later with a $21.5 million Series A funding round in 2008. Spotify then raised a Series B of $50 million in August 2009 at a $250 million valuation from three investors. The company then raised a Series C, D, E, F, and G, as well as a few lines of credit.
Most recently, the company agreed to buy a stake in China's Tencent (NASDAQOTH: TCEHY) Music Entertainment, which runs three music streaming services. In a tit-for-tat deal, Tencent will also buy an equity stake in Spotify.
In total, Spotify has raised $2.7 billion, according to Crunchbase Data, while CB Insights pegs the number a bit lower at $2.27 billion.
Spotify's current valuation
After billions in funding, growing its user base to 140 million with 70 million paying subscribers, where does Spotify's valuation stand?
After Spotify and Tencent agreed to exchange minority stakes in each other, sources told Reuters in December that its valuation is now at least $19 billion.
That's a sharp rise from the $13 billion valuation Spotify reportedly had last May when it first reached out to banks about advising it on a possible IPO.
Two heavy-weight competitors
This is where things get interesting.
Despite still being a private company, Spotify is the definite leader in the music streaming space.
Spotify said it hit 70 million paid subscribers this month, while its biggest competitor, Apple (NASDAQ: AAPL) Music, told Billboard in September that it had less than half that amount, with just over 30 million subscribers.
Potential Spotify investors may also be interested to know that Spotify is still growing at an impressive rate, adding about 2 million subscribers per month last year. Apple added about 1 million subscribers per month in 2017.
Of course, Apple did buy Shazam in December and could use its music-discovery capabilities to provide some cool new services for its subscribers. In addition, Shazam claims its app connects more than 1 billion people worldwide, which provides a huge base of potential Apple Music subscribers.
Spotify's second closest competitor, Amazon (NASDAQ: AMZN) Music, has only been around a little over a year. Last July, The Music Industry Blog, which tracks music app usage and spoke with industry experts, reported that the service had about 16 million paid subscribers.
That growth rate should be putting pressure on Spotify to keep updating its offerings. Spotify needs to stay one step ahead of Amazon, which lately seems to be encroaching on every market it feels like.
Of course, Apple and Amazon are both mature companies with multiple revenue streams. In fact, there's a debate about which of the two companies will hit a $1 trillion valuation first. Currently, Apple has an $898 billion market cap, while Amazon's is at $592 billion.
And the rest...
But what about the valuations of a more similar company, like Pandora (NYSE: P) or Tidal?
Pandora's market cap sits at $1.29 billion, which isn't bad considering its stock has been on a pretty steady downward slope since 2014. In its latest earnings report, the company announced $379 million in revenue.
The problem for Pandora is that while it reported an impressive 73.7 million active listeners, that's still a drop from the 77.9 million it had in the year-ago period. Even worse, it had only 5.19 million paid subscribers, a 29% increase from the same period last year, but still, nothing to brag about. The company has had trouble convincing users to pay for its services.
Last March, Pandora launched its first on-demand streaming service, Pandora Premium, for $9.99 per month, the price that has somehow become the industry standard. This is on top of its $5 per month ad-free Pandora Premium subscription option that doesn't allow for replays, offline listening, or on-demand listening.
Three-year-old Tidal, bought by rapper Jay-Z from Swedish parent company Aspiro for $56 million in 2015, was valued at $600 million in January 2017 when it sold a 33% stake to Sprint (NYSE: S) for $200 million. The last subscriber figure for Tidal comes from back in June 2016 when it claims it had 4.2 million subscribers.
In December, Norwegian business newspaper Dagens Næringsliv claimed that Tidal had only enough money to last six more months. Tidal fought back against the claims, saying that its business had grown each year since its inception.
Either way, it's not super encouraging that Tidal hasn't shared an updated subscriber figure.
Spotify looking good ahead of IPO
If this information tells you anything, it's that Spotify is in a good position ahead of its public offering. If it can keep current subscribers happy and keep adding about 2 million subscribers per month this year, then it might be worth investing in at its IPO.
The one thing that may concern investors is that Amazon and Apple have the money and power to make sudden movements that encroach on Spotify's top position, such as when Apple scooped up Shazam last month.
However, the company has been able to grow at a healthy rate all of 2017, despite its customers' having more and more options. And that's impressive.
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