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16.94 in the UK (for standard service) to lower prices in Eastern Europe and Latin America. Explosive Growth: Spotify is arriving off a growth burst, since 2015 especially, in both true number of users and revenues, as can be seen in the graph below. Other costs are trending up: You will find three other buckets of cost at Spotify -R&D, Selling & Marketing and G&A- and these costs aren’t only growing but eating up bigger proportion of profits. If there are economies of scale, as you’ll expect generally in most businesses, they are not manifesting themselves in the quantities yet.
The collective weight of these expenses are creating working losses, even though margins have become less negative, it is through the content cost controls primarily. At this stage of its story, Spotify is a growth company with lots of potential (no irony intended) but lots of rough spots to work through. 1 billion from its offering, but nothing of it will go to company. Instead, existing equity investors in the ongoing company will be getting the cash in return for their holdings.
No bankers, no problem: I believe that the bank role in IPOs is overstated, for an organization as high profile as Spotify especially. Bankers don’t value IPOs; they price them, with pretty crude prices metrics usually, though they reverse engineer DCFs to backup their pricing often. WITH MINIMAL Content Costs: Spotify’s entire value proposition rests on improved operating margins and a sizable portion of the improvement must come from continuing to lessen content costs as a percent of revenues.
With Limited Capital Investments: Spotify’s business model is built for scaling, with little dependence on capital reinvestment, except for R&D. Consequently, I suppose that small capital investments can create large revenues, utilizing a sales to capital proportion of 4.00 (placing it at the 90th percentile of global companies) to calculate reinvestment. Manageable Operating Risk but Significant Failure Risk: Spotify’s membership centered model and low turnover rate among subscribers does give some stability to earnings, though adding more clients and going for growth is a riskier proposition.
115.31. The shares that you will be buying will be non-voting, implying a discount with this true quantity, though how much you discount it will depend about how much you prefer and trust the business’s founders. The entire picture, with the complete tale embedded in it, is shown below. You can also down load the spreadsheet here. Year numbers in the prospectus were all in Euros The base, but all the valuation inputs (growth, cost of capital) are in US dollars, making it a US dollar valuation. In hindsight, 12 months amounts in US dollars I should have restated the bottom.
While it could not have transformed the valuation, it would have reduced money confusion. You are welcome to download the spreadsheet which has my valuation of Spotify and make it your own. There are three elements missing in this article. First, I have argued in my own prior IPO posts that what goes on after initial open public offerings is more of a pricing game when compared to a value game.