Spotify is poised to press the play button on a stock market float that will test investors’ faith in its future prospects, amid mixed fortunes for fast-growing technology companies.
Analysts said the performance of the music streaming service’s shares on its first day of trading on Tuesday would gauge market opinion on whether it can stave off fierce competition for music fans’ wallets and eventually make a profit.
The Swedish company’s listing on the New York Stock Exchange will also offer greater insight into investors’ attitudes to technology companies, following a string of floats that have attracted great fanfare but met with varying receptions.
Wall Street offered a timely reminder of the volatility that can affect firms reliant on the promise of things to come, as electric car firm Tesla’s shares slumped nearly 7% in early trading on Monday.
Billionaire Elon Musk’s company suffered amid forecasts that deliveries of its Model 3 vehicle are falling short of its targets, as investigators look into a fatal crash involving one of its cars in the self-steering Autopilot mode.
Spotify, like fellow tech firms such as Tesla and Uber, is yet to make a profit, as its income struggles to keep pace with costs, including the royalties it pays to record labels and artists.
Analysts expect it to be valued at $20bn-$25bn, although the listing is also something of a plunge into the unknown for potential investors.
Unlike most companies that float, Spotify is not issuing any new stock, which means it has not set a price for its shares in advance.
Would-be investors cannot turn to Spotify’s past earnings for guidance because it has never reported any, racking up combined losses of nearly €1bn (£87m) over the past three years.
The element of uncertainty could cause peaks and troughs in the price of Spotify shares, according to Laith Khalaf of stockbroker Hargreaves Lansdown.
“This approach will save the company money, but will probably lead to volatility when the stock starts trading, as the market tries to find a price it’s comfortable with,” he said.
“The fact the company isn’t turning a profit means the price discovery mechanism of a direct float is even more likely to be choppy.”
The success of the float will also signal the extent of investors’ belief in Spotify’s ability to thrive amid competition from the likes of Apple and Amazon, both of which have greater financial muscle.
Spotify is enjoying rapid revenue growth, up from €746m in 2013 to a predicted range of between €4.9bn and €5.3bn last year. It has an estimated 40% share of the global share of music streaming, giving it increasing bargaining power with labels and artists over the royalties it pays them.
User numbers are expected to increase from 157 million to 170 million this year, with paying subscribers slated to increase from 72 million to 90 million.
But the company is on course for fresh operating losses as large as €330m for the 2017 financial year.
“The challenge the company now faces is how to monetise non-paying customers more effectively, while paying out royalties to the various record labels for content at the same time,” said Michael Hewson of CMC Markets.
Recent technology floats have proved volatile, with cloud storage company Dropbox up 40% since its float last month, while Snap – the company behind social media app Snapchat – enjoyed a successful debut but has since fallen 15% below its float price, including a 7% fall in Monday’s early training.
Tesla’s share price fall on Monday saw it fall back below Ford in terms of stock market value, having overtaken the automotive titan in April last year.