SIGNALS

Today, Spotify is a privately-owned company. But in a few weeks, it will go public. That means you will have the opportunity to buy stock in the company. The question is, do you feel lucky?

Back in the day, there were LP record stores on every corner. They started going out of business when stores like Walmart started selling CDs. Walmart began shortening its CD aisles when Amazon started selling CDs. Apple put the whammy on that when it flooded the market with digital downloads. Today, of course, downloads are old-hat and music streaming dominates.

The historical trend is clear: we are moving away from owning physical music and even away from owning any music. Instead, we are noshing our music from streams proved by outfits like Amazon Prime, Apple Music, Google Play Music, Pandora, Qobuz, Slacker, Soundcloud, Tidal and Spotify. I don't know what delivery technology comes after streaming, but if streaming is the delivery choice de jour, and if the business is growing, would it make sense to invest in that business? Which brings us to Spotify.

Spotify is based in Stockholm. It provides access to more than 30 million songs to users in over 60 countries including most of the Americas, most of Europe, Australia, New Zealand, and some countries in Asia. As of June, 2017, it had more than 140 million monthly active users and at the end of 2017 had 71 million paying subscribers, up from 48 million in 2016. (Apple Music, its closest competitor, has about 36 million subscribers).

On February 28, 2018, Spotify filed for an initial public offering, to be listed on the New York Stock Exchange. This is expected to be the largest tech IPO of 2018 and will most likely take place in late March, or April. Its plan for listing is somewhat unique. In a typical IPO, an underwriter (an investment bank) sets an initial price, contacts sellers and buyers and provides any cash required to stabilize the stock price; IPO shares are available to the general public. However, Spotify's IPO might be called a non-IPO. It will not use an underwriter and instead will directly list on the NYSE, making its initial shares available only to institutional investors. Spotify will not issue new shares, but existing shareholders will be able to take their shares directly to market. Thus the listing will not raise new capital for the company (or dilute the value of its shares) but will allow existing shareholders to make a return (could be either a positive or negative return) on their investment. Once the smoke clears, the stock will be bought and sold on the NYSE under the ticker name SPOT.

So, is Spotify a good investment? Even if streaming is the present and maybe also the future, is it the best streaming company to own? Numbers are hard to come by, but at least according to the New York Times, Spotify is the most popular music streaming service both in terms of non-paying (ad-supported) listeners and paying subscribers. Unlike some newly listed companies, Spotify is earning hard cash. But as of 2017, Spotify is not a profitable company. Let's be clear on that: Spotify has yet to turn a profit.

Since CEO Daniel Ek founded Spotify in 2006 and launched it two years later, the company has raised money along the way; for example, in June 2015 it closed a $526 million round of fundraising with a valuation of $8.53 billion. In January 2016, it raised another $500 million in convertible bonds. In March 2016 it raised $1 billion in financing plus debt. The company's value is estimated to be anywhere from $6 billion to $23 billion in private markets. The company generated revenue of about $5 billion in 2017, a 39% growth over 2016's $3.6 billion. However, the company posted a loss of about $1.5 billion last year, $1 billion of which was from a non-recurring expense on a convertible note; its operating loss for 2017 was about $461 million. Its operating loss was about $426 million in the prior year. Since its founding, it has lost nearly $3 billion, mainly due to the cost of licensing music content.

So, is Spotify a good bet? So far, billions of dollars have been put into the enterprise without a return on the investment. On the other hand, Spotify is the market leader in a burgeoning market. Should you invest? My answer is simple: I am copping out. I am not a financial advisor. Anything you read here could be wrong. Do not listen to anything I say. If you are interested, start your due diligence by reading Spotify's filing with the Securities and Exchange Commission. Good luck.