Spotify IPO: Factors to Consider Before Investing

The rumors of a Spotify IPO were stoked yesterday (Monday) following a report that the music-streaming company is recruiting a U.S. financial reporting specialist.

The "External Reporting Specialist" job advertisement on Spotify's website states the company is looking for an employee who can "prepare the company for [U.S. Securities and Exchange Commission] SEC filing standards. Set up all reports necessary to be SEC compliant."

Spotify has made no public statements regarding a potential IPO, but a company spokesman told Reuters, "As Spotify grows and becomes a more mature company we are looking for people who can help us keep our financial reporting in order and up to global standards."

If Spotify were to launch an IPO, it would likely happen sometime in 2015. According to Reuters, the firm could be valued as high as $8 billion.

Will a Spotify IPO be just another flashy tech IPO, or does Spotify have the financial stability to be a profitable investment?

Here's a look.

Spotify IPO Has to Jump These Hurdles

Spotify boasts 24 million active users, six million of which are paid subscribers. That's up from 10 million users and 2.5 million paid subscribers in 2010.

Those growth figures will attract attention as investors and analysts try to gauge the potential of the music streaming service. Much like the Twitter Inc. (NYSE: TWTR) and Facebook Inc. (Nasdaq: FB) IPOs, the company's valuation will be judged more on potential than a strong financial track record.

Despite growing subscriber totals, profits have been elusive for Spotify. High royalty fees are a major issue for music-streaming companies.

In 2012 corporate filings, Spotify reported revenue of $571 million, but a net loss of $78 million.

Another growing concern is competition in the music-streaming market.

Numerous other services including iTunes Radio, Songza, Sirius XM, Google Play Music All Access, and Rdio are all fighting for ground in the same market. And that will affect how investors make money off of Spotify, as Money Morning's Chief Investment Strategist Keith Fitz-Gerald said today...