The verdict is in: Spotify’s direct listing is an unqualified success


VCJ Venture Guest Column IPO
The Spotify logo is displayed after the stock began selling as a direct listing on the floor of the NYSE, in New York, April 3, 2018. REUTERS/Lucas Jackson.

By Rohit Kulkarni, SharesPost

Spotify took an enormous gamble when it decided to directly list its shares on the NYSE in the largest deal of its kind. Unlike others, the company decided not to use the usual crowd of investment bankers, roadshow organizers, bookrunners and equity underwriters to market its stock and set an IPO price.

After analyzing data from more than 50 days of trading, we can safely conclude that Spotify’s risky move has paid off.

Compared to its peers, who opted for the traditional IPO route, Spotify ranks in the middle of pack on trading volume and quite low on volatility. Shareholders have bought and sold more than 175 million shares, or 99 percent of estimated shares outstanding. Despite such heavy trading, the volatility in Spotify shares is below 70 percent of its peers.

First sign of success: Spotify’s stock price. After setting an initial price at $132 per share, Spotify watched its stock soar to $169 per share, and then close its first day of trading at $149 per share. Since then, Spotify shares have traded in a narrow band, and have continued to grind higher, outperforming both the S&P 500 and Nasdaq indexes.

Spotify shares have outperformed the S&P 500 and Nasdaq since its IPO. Source: SharesPost research, Google Finance.

Second sign of success: average trading volume. Unlike typical IPOs, Spotify restricted only 10 percent of its outstanding shares from trading. With the exception of Tencent and Tencent Music Entertainment, none of Spotify’s pre-IPO shareholders had signed contractual lock-up agreements prior to the direct listing. By contrast, Dropbox locked up roughly 80 percent of its outstanding shares for 180 days following its IPO.

Theoretically, Spotify ran the risk of supply outstripping demand, leading to a downward spiral in its share price. Companies launching traditional IPOs might see their stocks thinly traded at the beginning, which leads to a greater likelihood that the low supply of shares is artificially boosting valuations.

Third sign of success: fairly low stock price volatility. Investors generally agreed that Spotify’s shares risked volatility for an extended period of time and could possibly trade at a discount due to a distorted balance between supply and demand. With fairly average trading volume, we see the low volatility in Spotify’s shares as a remarkable sign of efficient equity capital markets at work.

Technology entrepreneurs have been closely watching Spotify’s IPO. The big question is whether other major unicorns like Uber and Airbnb can successfully emulate Spotify’s strategy. Here are some factors unicorns might consider before a direct listing:

  • Will the IPO yield large amounts of capital? Do you really even need to raise money? Spotify didn’t need to raise additional money because of its access to private capital.
  • Have you “tested the waters” by enabling existing shareholders access to private capital markets? Spotify enjoyed robust secondary trading activity for its shares prior to its IPO. This helped set up a pricing precedent for Spotify’s direct listing.
  • Can you attract investors of all shapes and sizes and generate sufficient demand without bankers and roadshows? Spotify is a prominent brand, which helped the company generate considerable interest from both institutional and retail investors.
  • Can your existing operations financially support your business? Read #1 again. Spotify’s business already generates positive cash flows to fund future growth initiatives.

Unicorns that consider these factors should very well take the plunge if it makes sense for their business, as the direct listing IPO waters are warm.

Rohit Kulkarni is a managing director and head of research at SharesPost Inc.

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