- In Part 2 of our 2015 IPOs series we look at the Uber & Spotify IPOs.
- We take you through revenue & valuations, and tell you how much it could cost you to own these companies.
- We round up other key facts you need to know, ahead of these upcoming IPOs.
In the 1st part of this 3 part series about the most anticipated IPOs in 2015, we covered the Airbnb IPO, the Box IPO and the Dropbox IPO. In part 2, we put start-ups Uber and Spotify under the scanner, to tell you all you need to know, ahead of these upcoming IPOs.
With markets correcting on the back of global economic woes, the environment for IPO’s has changed since the Alibaba IPO. Nonetheless, the vibrant start-ups in our list of probables for a 2015 IPO have generated a lot of interest, from onlookers, users and investors alike. Whatever the outcome of their public listing endeavors, it’s safe to say that interesting times are ahead.
The Uber IPO is probably the most anticipated one in the list of 2015 IPOs we’ve covered so far. Uber has been in the news lately, as much for its legal tangles, as its recent $40 billion valuation, following its $1.2 billion round of funding in Dec 2014. So far, Uber is believed to have raised upwards of $3 billion in funding.
The list of Uber investor has the likes of Google Ventures, Qatar Investment Authority, Goldman Sachs and Jeff Bezos, among others. The latest addition to that list is China’s search giant, Baidu. Reportedly, earlier this month, Baidu invested $600 million in Uber.
There are no official numbers on Uber revenue. Uber Revenue estimates based on leaked numbers in Oct 2013, pegged 2013 platform spend at about $1 billion. Since Uber takes an approximate 20% cut, net revenue should have been about $200 million.
Uber Revenue 2014 & 2015 Estimates
Platform spends are expected to come in at $2 to $3 billion this year and climb to about $10 billion by the end of next year (roughly a 3x growth every year. So, Uber revenue (net) should be about $400 – 600 million in 2014, and about $2 billion at the end of 2015.
Uber valuations of $40 billion translate to a price to sales ratio of 100, based on 2014 net revenue estimates. By next year, that multiple should come down to about 20, assuming valuations don’t go higher. Based on available data, Uber valuations are expensive. Come the Uber IPO, valuations are only going to go even higher. However, until more data is available, that’s all that can be said.
Uber Legal Problems and Competition
Uber has had its share of legal hassles. While regulators have deemed the Uber service illegal in Portland, the company has met with similar regulatory hurdles in Las Vegas, Canada, the Netherlands, and India, one of its fastest growing markets.
Of course, these challenges aren’t unique to Uber. Another popular IPO candidate, Airbnb has faced legal challenges too. Airbnb has been legalized in San Francisco, but remains under the scanner in New York. In both cases (Uber and Airbnb), the allegations pose a threat to the core business model, at least in specific locations. As expected, Uber is contesting these claims, and the outcomes will be crucial to the sustenance of Uber’s growth and scalability.
Uber doesn’t own a fleet of taxis/cabs. Rather, it acts as a marketplace for cab drivers. So, essentially, Uber is just an app. There’s a school of thought that questions Uber valuations on the grounds that Uber’s model is easily replicable, with low entry barriers. We won’t get into that debate here, but even with a global presence, it does seem that Uber will face more and more competition in the times to come.
For instance, SoftBank, known for its early stage investment in Alibaba, recently invested $250 million in GrabTaxi, a south-east Asia focused taxi booking app. SoftBank has also invested in an Indian competitor, Ola Cabs. With the amount of interest Uber has generated, it’s inevitable that more such local competitors will spring up, and also get funded by high profile investors.
Either way, when it does come, the Uber IPO promises to be a very interesting one.
Spotify, the online music streaming service, has consistently delivered strong growth in its user base and revenue while cutting losses, making it the talk of the town. Goldman Sachs, Accel Partners and The Coca-Cola Company are some of Spotify’s investors.
Spotify User Base
Spotify, which hit the milestone of 1 million users in March 2009, now has an active user base of over 50 million (monthly active users), with over 12.5 million paying subscribers. Spotify’s active user base has clocked a 25% growth, up from 40 million users in May 2014.
Spotify Revenue & Profitability
About 91% of Spotify revenue came from subscriptions, and 9% came from advertising, in 2013. What’s specifically impressive from a user monetization standpoint, is the growth in Spotify paying subscribers. Spotify’s subscriber base which stood at 6 million in March 2014, saw a 67% jump to clock 10 million, two months later, in May. Spotify now has 12.5 million paid subscribers, having more than doubled in less than 9 months.
Spotify revenue grew by about 74% in 2013, a drop from previously seen levels, in excess of 100%, but impressive nevertheless. Spotify 2013 revenue came in at $931 million. More importantly, Spotify loss margins have been reducing from as high as 147% in 2009, down to net loss of 8% in 2013.
Spotify claims to pay about 70% of its revenue back to the “music community”, which includes costs related to royalty and content licensing. This suggests that the Spotify business model is inherently not a high margin business.
Chart: Spotify Revenue & Profitability
Based on Spotify Revenue and net losses data (In Euro’s) from Statista
Spotify has raised $537.8 million in 7 rounds of funding. In its latest round of funding in Nov 2013, Spotify raised $250 million, at a valuation of $4 billion. Spotify valuations translate to a Price to Sales ratio of 4.3 based on 2013 revenue.
If Spotify revenue grows by 50% to 70% in 2014, translating to a revenue of $1.4 - $1.6 billion, Spotify valuations will look far more appealing at a Price to Sales ratio of 2.86. But going by reports, when Google wanted to acquire Spotify, the streaming service dished out a $10 billion price tag. Since, this was in July 2014, a higher target for the IPO shouldn’t come as a surprise.
At a $10 billion valuation, Spotify valuations will range from a Price to Sales multiple of 7.1 to 6.3, higher than Pandora valuations. While Spotify valuations are not cheap, they are not as appalling as some of the other IPO candidates we have featured in this 2015 IPOs series so far. While taking a call on the Spotify IPO, a lot will hinge on profit margins in the lead up to the IPO.
If you missed our coverage of the Airbnb, Box and DropBox IPOs, you can take a look at part 1 of this series, titled "Red Hot IPOs That Are Due To Hit You In 2015 - Part 1".