Spotify is planning to go public through a direct listing on the New York Stock Exchange in the next few weeks, and that’s piqued the interest of investors hoping it’s the next hot tech stock (a little more Netflix, a little less Snapchat). So, should you invest?
Photo: Nikita Kachanovsky on Unsplash
First: Make sure you’re investing via low-cost exchange traded funds or index funds before you shove a bunch of money in an individual company’s stock. You want to get your financial basics covered before you take a huge risk like that.
OK, back to Spotify. There’s the classic advice, “buy what you know”, and plenty of people know Spotify. It has 71 million subscribers and 159 million active monthly users, as of 31 December 2017. So it isn’t wrong to think that if you and 159 million other people love Spotify, it could make a decent tech investment if you’re looking to diversify with a few individual stocks.
But don’t jump on it as soon as it goes public, suggests Kevin Dixon, senior market analyst at Market Traders Institute. Sit on the sidelines and let the big time investors set the market, and then buy in small blocks in a few weeks when things have settled down. “[Going public] can be pretty risky because generally institutions are going to start paying attention,” he says. “Wait a few weeks, and then start following. The first day will be a very volatile day.”
And recognise that Spotify’s direct listing (as opposed to an initial public offering, or IPO) means there won’t necessarily be a wealth of shares to buy up. Writes James Royal for Nerdwallet,
Unlike the traditional route, where a predetermined number of shares will become public on the day of the IPO, in a direct listing there are no guarantees. In this case, going public simply means that the stock can be traded on the exchange; not that it will be. Shares will be traded publicly only as insiders sell them. Maybe a few shares are sold, or maybe many are. So there won’t be much of a market unless insiders sell a lot of stock, and the lack of selling may end up creating a topsy-turvy market.
Because the shares may be scarce, investor demand may be much greater than normal, which could lead to even greater volatility.
As I alluded to above, Snapchat was the hot tech stock in 2017, and it just closed above its IPO price last month for the first time since June 2017. All of this to say, it’s OK to be patient and really think through your decision.
While you wait, do some research on Spotify’s business. You need more backup than just the fact that you like the product. How does it make money? What’s its long-term plan to continue to make money? What are alternatives that are eating into its market? Consider: The company “posted an operating loss of $461 million [$AU586 million] on revenue of nearly $5 billion [$AU6 billion] last year,” according to Recode. All of these are things you’ll want to take into account.
“You look at a company like Amazon, everyone has made a fortune who bought Amazon, that company still doesn’t make a profit. You can get yourself in a lot of trouble doing that,” says Sean O’Hara, president of Pacer ETFs. “I think Spotify has a good fundamental business, but it all comes down to valuation. Is it worth what it says it’s worth? There’s no free lunches out there. At some point I think you have to make money for people to continue to buy your stock.”
None of this is to say you shouldn’t invest in Spotify, or see what else is out there. But make sure you’re not putting all of your money into a hot tech stock because you’re trying to find the next Google. Wait out the first few weeks, and come back to it after you’re comfortable with the company’s business model and long-term plan.