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If you're thinking of investing in Spotify Technology SA (NYSE: SPOT) at the launch of its initial public offering or soon thereafter, I have two words for you…
And here's two more…
Yes, Spotify has roughly 75 million registered users around the world. Yes, private markets have valued Spotify as high as $26.5 billion. And yes, Spotify's "direct listing" is an interesting experiment in stock market "democratization."
But here's the thing. As I've told you time and again, IPO investing is extremely risky for Main Street investors – and that direct listing could make the Spotify IPO even more dangerous than usual.
Plus, there's a tech player out there that is relatively new to music streaming – but that is set to eat Spotify's lunch. At the very least, this new music streamer will eat into Spotify profit margins and blunt its sales growth.
Consider that, as of February, this company's streaming service counted 36 million users. Barely a month later, that figure had climbed to 38 million.
That's a pace that should put would-be Spotify investors on notice. After all, Spotify launched in 2008, and the streamer I have in mind is less than three years old.
The music streaming sector is one we want to be in. Global Industry Analysts Inc. says it will have global sales of $9.7 billion by 2022. For its part, Goldman Sachs has predicted the streaming music market will increase to $28 billion per year by 2030.
That's why I want to show you the company set to dominate this market (and many other markets, too)…
Don't Listen to the Hypesters
Don't get me wrong. I'm not a Spotify basher.
While I do most of my music streaming with rival Pandora Media Inc. (Nasdaq: P), I do also use Spotify, especially when I'm traveling outside the United States, where Pandora has zero presence.
I love the ease of music streaming and admire the technology behind it.
But it's not the tech platform that troubles me when it comes to Spotify. It's the growing competition and the heavy pressure an IPO puts on Spotify – and its investors.
Spotify is going to have a very hard time living up to the hype. For just one example, The Wall Street Journal lists it as the ninth most valuable startup in the world.
After raising total equity funding of about $1 billion, the firm has a pre-IPO value of around $19 billion. Against that backdrop, if Spotify's IPO doesn't rip the cover off the ball, then those same Wall Street hypesters will start bad-mouthing it as a failed offering (and they'll say they "knew it all along").
Plus, looking out over the next couple of quarters, any earnings results that disappoint would further slam the price.
Even if Spotify had the market to itself, I would still tell most investors to steer clear. Yes, Wall Street and Silicon Valley need the lifeblood of IPOs, but most remain far too choppy in the first few months of trading for traders like us.
But those aren't the only risks Spotify investors face…
A Crowded Field That's Getting More Crowded
Spotify has built a lot of buzz for its unique approach to the IPO market. Rather than use pricey bankers, the firm is listing its shares directly on the New York Stock Exchange.
It's an interesting move, but it could make shares very volatile in the early days of trading. We just don't know how the market will handle this kind of offering.
Spotify is trying to strike while the iron is hot. Its sales grew nearly 40% last year, to around $5 billion, but that still led to a $1.5 billion loss.
So the $1 billion stock offering only provides a lifeline for three or four quarters.
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Spotify's music streaming service has 71 million paying subscribers. Another 80 million opt for its free streaming service. As a comparison, Pandora has 74.7 million active users, down from 93 million last spring, and less than 6 million paid users.
To be clear, this is a crowded field, one that's very challenging for firms that can't pair music streaming in a bundle with other services. iHeartMedia Inc. (OTC: IHRTQ), for example, simply couldn't grow large enough to turn a profit.
And it just filed for bankruptcy.
Other Spotify rivals include Amazon Music, Google Play Music, and Slacker Radio.
The Rise of the "Stealth" Streamer
About the Author
Michael A. Robinson is a 35-year Silicon Valley veteran and one of the top technology financial analysts working today. He regularly delivers winning trade recommendations to the Members of his monthly tech investing newsletter, Nova-X Report, and small-cap tech service, Radical Technology Profits. In the past two years alone, his subscribers have seen over 100 double- and triple-digit gains from his recommendations.
As a consultant, senior adviser, and board member for Silicon Valley venture capital firms, Michael enjoys privileged access to pioneering CEOs and high-profile industry insiders. In fact, he was one of five people involved in early meetings for the $160 billion "cloud" computing phenomenon. And he was there as Lee Iacocca and Roger Smith, the CEOs of Chrysler and GM, led the robotics revolution that saved the U.S. automotive industry.
In addition to being a regular guest and panelist on CNBC and Fox Business Network, Michael is also a Pulitzer Prize-nominated writer and reporter. His first book, "Overdrawn: The Bailout of American Savings" warned people about the coming financial collapse - years before "bailout" became a household word.
You can follow Michael's tech insight and product updates for free with his Strategic Tech Investor newsletter.