Spotify makes stock market debut

May 29, 2018

Spotify began trading on 3 April, when 5.6 million shares were exchanged at $165.90 per share.  That effectively valued the company at around $29 billion.  As the day went on, the share price decreased and the company would ultimately close its first day of trading at $149.01 per share – more than 10% lower than its opening price.

Nonetheless, that closing valuation was still significantly higher than the initial reference price of $132 per share set by the New York Stock Exchange.  Indeed, at the end of the company’s first day, Spotify’s market valuation was $26.5 billion – a marked increase on the widely predicted valuation of $25 billion.  As a result, 35-year-old Spotify co-founder and CEO Daniel Ek’s 9% stake in the company became worth nearly $2.5 billion.

The initial concerns over price volatility as a result of Spotify’s direct listing did not come to pass, given that only 3.1% of eligible shares at the IPO’s launch were sold.  Still, there may well be further volatility should there be any sudden movements in the market.  In fact, it is accepted that a more realistic reflection of the company’s fair value will materialise in the coming months, once more Spotify shareholders and employees decide to sell their stock.

It will now be interesting to see how the major labels, and the independent labels represented by Merlin, react – and, more specifically, what they do with their equity stakes in Spotify.  In 2016, Warner Music Group was first to declare that it would split any proceeds from the sale of Spotify stock with artists.  Following Spotify’s debut, some major record labels have yet to disclose any sale.  However, as of Friday 27 April, Sony Music Entertainment has sold around 49.2% of its shares in Spotify which has brought in an overall gain of roughly $1.02 billion.  Also, as of Monday 7 May, Warner Music Group has sold around 75% of its Spotify shares and has received approximately $400 million – $300 million of which, Warner announced, will go to the shareholders.

So, early signs suggest that Spotify’s direct listing was far from a disaster.  Although Spotify’s share price slid 9% following the publication of its first quarterly financial report as a publically listed company on Wednesday 2 May, the company has reached 75 million premium users (or paying subscribers) – a 45% increase on the figures at this time last year and in line with Spotify’s projection.

Nonetheless, with Spotify’s share price closing at $156.73 per share on Friday 25 May, just over three weeks on from the 9% fall, the consensus is that trading so far has been a success.  Moreover, the relatively smooth progress of the company’s direct listing should allow Spotify to invest and to continue its growth.  And perhaps Spotify’s debut will inspire other tech companies to follow their lead.

Ed Weidman, Associate, and Alastair Fatemi, Trainee Solicitor, Simkins LLP