- Spotify user growth is impressive.
- Spotify has robust revenue growth & shrinking losses.
- Reasonable valuations & improving profitability could make the Spotify IPO interesting.
Spotify is an online music streaming service that’s grown to be very popular among users and investors, and on taking a deeper look at its financials, it’s not difficult to see why. Spotify makes an impression with its strong user growth trends, its robust revenue growth and shrinking losses. Valuations don’t seem sky high either, at least at the moment. The Spotify IPO (initial public offering) is believed to be one of the IPOs due in 2015, and a lot will hinge on profitability and pricing of the IPO. But how much could you end up paying to own this company in the IPO?
Spotify User Growth - It’s Quite Impressive!
As we’ve learnt from the curious case of Twitter user growth (or the lack of it), user growth is everything, well, almost. As an internet based platform, more users means more revenue, more scalability and better valuations.
In case of Spotify, user growth has been impressive and looks to be improving as well. Having clocked 1 million users in March 2009, Spotify currently has over 50 million monthly active users (MAUs). What’s impressive is the 25% jump in 6 months, from 40 million MAUs in May 2014 to 50 million MAUs in November.
About 25% of its active users are paid subscribers, and that ratio has been roughly there or thereabouts consistently. Impressively, Spotify’s paid subscriber base has also grown at a fast clip, more than doubling in under a year. That’s good news for the company and its investors.
Trivia: Reportedly, Google wanted to acquire Spotify back in July 2014, but the deal fell through when the music streaming service quoted a price of $10 billion.
Spotify Revenue Growth Is Robust
Spotify’s revenue growth inspires confidence. It does look as if growth has declined sharply in percentage terms, but part of that is because of the increasing base. In monetary terms, Spotify’s absolute incremental revenue has gone higher each year.
Spotify added 61 million Euros to its topline in 2010, 114 million in 2011, 242 million in 2012 and 317 million in 2013. Besides 74% is not a bad growth rate at all. In Dollar (USD) terms, Spotify brought in $931 million in 2013, and going by the growth in subscriber numbers, it looks all set to go past the billion Dollar mark in 2014. More so because, Spotify earns about 90% of its revenue from subscriptions, and the rest from advertising.
What strikes you is how different Spotify’s revenue model is from that of Pandora’s Pandora (NYSE:P). Bulk of Pandora’s revenue comes from advertising, 82% in 2013. The fact that subscriptions contribute such a large chunk of Spotify’s revenue, makes the model at least a tad bit more robust and sustainable.
Trivia: Arguably two of the hottest start-ups, Uber and Spotify have tied up to combine their services and allow users pick their music for the drive.
Spotify Profitability – Losses Are Shrinking
Solid growth and mounting losses, it’s a familiar storyline in the world of tech start-ups. But Spotify has shown the potential to script a different story. Losses have reduced significantly compared to earlier periods, and one would imagine that Spotify will be trying to cross the line and become profitable.
At this point though, there’s an important element of Spotify’s business model that you have to bear in mind. The music streaming business comes with royalty and licensing costs, and Spotify pays out about 70% of its revenue to artistes, and the likes. So, straight away, there’s a cap on profitability.
Then there are other costs like personnel and sales & marketing among others. So, inherently, it might not be a very high margin business, and it will boil down to operating efficiency.
According to CrunchBase, Spotify has raised $538 million in 7 rounds of funding from investors ranging from Coca Cola (NYSE:KO) (wonder if Warren Buffett approves of this) and Goldman Sachs to Accel Partners, among others.
Trivia: We all know that Warren Buffett avoids tech stocks. Coca Cola is one of Warren Buffett’s top holdings. Berkshire Hathway (NYSE:BRK.A) owns over 9% of the beverage giant. Buffett used to be on the board of directors till 2006. Since 2010, his son, Howard Buffett, also a Director at Berkshire Hathway, is on Coca Cola's board.
The latest round of funding worth $250 million from Technology Crossover Ventures in Nov 2013, values Spotify at $4 billion. But when Google wanted to acquire Spotify in July 2014, the latter reportedly asked for $10 billion to be bought out. With the strong growth in users since then, a fair assumption would be that they’d expect a higher price during the IPO.
At $10 billion, Spotify valuations translate to a price to sales ratio of 6.2, assuming the same rate of growth for revenue in 2014 as that seen in 2013. That’s not outlandish, and among tech stocks, we’ve seen far worse, haven’t we?
Spotify IPO - Closing Thoughts
To sum up, it will boil down to Spotify’s profitability, and the pricing of the IPO. The Spotify IPO date is not known as yet, but as things stand, the Spotify IPO is definitely one to keep an eye out for.
As part of our coverage of IPOs scheduled in 2015, we’ve been writing about a lot of exciting start-ups, and their much talked about IPOs, like the Box IPO, the DropBox IPO, the Airbnb IPO and the Uber IPO among others. You can also find a link to the entire list of IPO related articles on our home page.
If you have any inputs that we might have missed regarding Spotify, or any of the other topics we’ve been covering, we’d love to hear from you.