SPOT the Different IPO

Spotify’s IPO last month was the most novel public market debut since Goldman Sachs took Ford public in 1956. In the case of the Internet radio company, they listed their shares with no underwriters, no multi-week roadshow, and no broker to support the stock in the aftermarket. Ford’s debut +60 years ago was strange in its own way, with an opaque family trust as the issuer, dual class stock (a novelty at the time) and a process so secretive that Goldman’s capital markets team had to memorize the order book for fear of a paper copy leaking to the press.

Sixty-two years later, and Ford is still public despite its unorthodox beginnings. Given its consumer brand recognition, the deal was actually oversubscribed despite its quirks. Three hundred thousand individuals and institutions bought on the transaction. The IPO raised $700 million, or $6.5 billion in today’s dollars.

Whether Spotify is around in 62 years is anyone’s guess, but the company’s unusual path to public ownership is a story in its own right. Rather than go the usual route and pay investment banks to underwrite the deal, they went directly to the New York Stock Exchange in a direct listing. Instead of doing a multi-week roadshow to visit with potential investors, SPOT did one webcast. And since they were going direct, they were allowed to offer financial guidance to help investors value the company.

All that happened a month ago (April 3rd), so enough time has passed to measure the SPOT IPO against deals done in more typical fashion. The numbers here:

#1. IPO Discount: On average investment bankers try to price IPOs so they rise by roughly 10% over the first month of trading. Most of this is to compensate buyers for the risk of purchasing a new stock. The rest is to keep investors interested in purchasing the next deal that comes around.

Since SPOT’s buyers had to purchase in the open market, we’ll use the average of the open and closing prices on Day 1 to approximate their entry point: $159.46. The open was $165.90, and the close went off at $149.01.

SPOT closed today (pre earnings release) at $170, a gain of 6.6% from our simulated IPO price.

Bottom line: even with SPOT’s novel listing approach, there was an IPO discount on Day 1. It wasn’t as large as 10%, but it wasn’t zero either.

#2. Investor communications/first quarter as a public company. The real purpose of a roadshow is to let investors have face-to-face contact with company management. This gives buyers a sense of their communication style, particularly as it relates to financial guidance. IPO players like companies that under-promise and over-deliver, and they expect underwriters to deliver that message to companies they bring public.

Bottom line: SPOT is the kind of company that delivers on its guidance but not more, as we found out after the close today. The company reported in line, and the stock is down 8% after hours. Also worth noting: at $157/share, it is trading below the IPO price approximation we mentioned in #1.

#3. Performance versus peer group. SPOT is a Swedish company with a Luxembourg address on its SEC filings. That makes it ineligible for inclusion in the S&P 500, and since it listed on the NYSE there’s little chance it will make it into the NASDAQ 100 or Composite Index.

All this means one thing: the only reason to own SPOT as an institutional money manager is because you expect it to outperform the major indices. You don’t “Have” to own it because it is not in any other commonly followed market measure. In that respect, SPOT is a very binary stock for most money managers.

Here’s how the relevant indices have done over the last month:

• S&P 500: +2.1%
• NASDAQ: +3.4%
• Russell 2000: +4.4%
• S&P Large Cap Tech: +3.7%

Bottom line: before today’s earnings announcement, SPOT had earned its place in investor portfolios with its 6.6% advance over the month. If the stock doesn’t rebound over night/tomorrow, that will change.