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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
Yet the greatest threat to Spotify is the world's largest seller of digital content.
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I'm talking about Apple Inc. (Nasdaq: AAPL), which operates the popular iTunes store and also serves as a platform for hundreds of top-selling apps.
Apple took its time to enter the streaming music field, ensuring that it got it right the first time - and it did so rather stealthily so that it didn't make a splash with an inferior product. The efforts were aided by music industry legend Jimmy Iovine, who has been at the vanguard of music industry changes going back to his early work with John Lennon and a young Bruce Springsteen.
Apple Music launched in June 2015, offering not just curated playlists, but also 100 different around-the-clock live broadcasts.
By last year, the firm was adding 1 million net new subscribers each month. That's when Apple delivered a smart upgrade as part of the new iOS 10 platform, bringing in great reviews for a much-improved interface.
At the recent SXSW Conference in Austin, Apple Senior Vice President of Internet Software and Services Eddy Cue said that the monthly growth rate has now spiked up to 2 million.
Sure, Apple's nearly current 40 million user base lags Spotify, but that gap is quickly closing. And yes, Apple Music is as good a platform as Spotify just yet.
But as we saw with the 2017 redesign as part of the iOS 10 upgrade, Apple will keep improving the service until it is a top-in-class platform - and it will overtake Spotify soon.
Apple Music falls under its Internet Software and Services business. That was a $30 billion unit last year, and it's on pace to swell to $42 billion by next year.
To beef up Apple Music's sales, the firm recently bought Shazam for $400 million. That's one of the largest acquisitions in the firm's history, showing its level of seriousness here.
Shazam is behind the tech that makes it easy for users to ID new songs and buy them. Maybe you use it yourself - or have seen folks using it at a restaurant or mall. This feature plays to a built-in Apple advantages: the iPhone, its deluxe built-in music player, and the iTunes store.
Beyond Music Is the Bottom Line
Of course, there's a lot more to like about Team Tim Cook than just the music streaming platform.
You know Apple is a smartphone leader, selling nearly 80 million phones each quarter.
But did you know that virtually all of Apple's products and services deliver terrific profit margins? By next year, the firm will produce a staggering $100 billion in adjusted earnings.
Add in the more than $200 billion that the firm is repatriating thanks to the new tax codes, and the firm is positioned to become one of the greatest share-buyback stories of all time.
Back on Jan. 26, when I told you about that tsunami of cash headed to our shores, I said I believed Apple shares are headed to $250 within the next 30 months.
After two months of market turbulence, Apple shares have skidded a tad since then - but I stand by my $250 by August 2020 prediction.
You see, with its strong hardware platform and bulletproof balance sheet, Apple is simply too powerful a rival for Spotify - or just about any other rival.
So instead of swimming upstream with Spotify's IPO, let's put our money in a proven winner.
Instead of going after quick gains - and probably failing - you'll find yourself building true wealth.
The kind of wealth that can fund a comfortable retirement... a grandkid's college education... or the dream vacation of a lifetime.
I'll be back later this week with a big trend no one's talking about - and some investments you can make to take profitable advantage of that.
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The post You Can Lose Your Shirt on Spotify IPO - or Do This appeared first on Strategic Tech Investor.
About the Author
Michael A. Robinson is a 36-year Silicon Valley veteran and one of the top tech and biotech financial analysts working today. That's because, as a consultant, senior adviser, and board member for Silicon Valley venture capital firms, Michael enjoys privileged access to pioneering CEOs, scientists, and high-profile players. And he brings this entire world of Silicon Valley "insiders" right to you...
- He was one of five people involved in early meetings for the $160 billion "cloud" computing phenomenon.
- 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.
- As cyber-security was becoming a focus of national security, Michael was with Dave DeWalt, the CEO of McAfee, right before Intel acquired his company for $7.8 billion.
This all means the entire world is constantly seeking Michael's insight.
In addition to being a regular guest and panelist on CNBC and Fox Business, he 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 the word "bailout" became a household word.
Silicon Valley defense publications vie for his analysis. He's worked for Defense Media Network and Signal Magazine, as well as The New York Times, American Enterprise, and The Wall Street Journal.
And even with decades of experience, Michael believes there has never been a moment in time quite like this.
Right now, medical breakthroughs that once took years to develop are moving at a record speed. And that means we are going to see highly lucrative biotech investment opportunities come in fast and furious.
To help you navigate the historic opportunity in biotech, Michael launched the Bio-Tech Profit Alliance.
His other publications include: Strategic Tech Investor, The Nova-X Report, Bio-Technology Profit Alliance and Nexus-9 Network.