The IPO of Spotify in April 2018 was the largest public offering of a company since the Snapchat IPO of a year earlier. Much interest was generated around the time of this event and many wondered if a study of the performance of Spotify shares might answer the vexed question of whether tech was a good sector for investment or not. If you were or are interested in Spotify shares then here are a few points which you might care to keep in mind. Spotify shares could seem a good investment at first glance; chances are that any potential investor will know about the position which Spotify occupies in the music streaming sector, which is that of leader, well ahead of its closest rival, Apple Music. A little research will reveal that Spotify was valued at $19 billion in 2017 and that that year saw revenue of $4.99 billion for the same period, an increase of a hefty 39%. You would also learn that the gross margins of the company grew from 14% to 21% in the same year. The Stockholm based company had 157 million users in that year, 71 million of whom paid for the privilege. All of these facts might seem to show the essential truth behind Spotify and to answer the question posed in our title with the simple words: ‘Now and as much as possible!’ Yet this analysis of Spotify shares would ignore powerful counter-indications, which might suggest a much more cautious investment strategy.
If you are a potential investor in Spotify shares then there is one very important factor which you should bear in mind; tech IPOs have, historically, tended to have a rocky time in the first twelve months after the offering. In fact, eight out the ten largest tech IPOs in the USA have seen between 25% and 71% losses over their first years. If Spotify follows this trend, then we might answer the question posed in the title with: ‘Wait and see until the first year is over and make your decision then.’ Why this be the case for Spotify shares as well as those of other tech IPOs is a large question, but one which is continually asked about the tech sector. One common factor seems to be that while tech IPO companies frequently show good market positions with a healthy subscriber base and much room for expansion in the larger market, they also tend to show that the companies in question are not profitable. This is the case for Spotify, which saw its losses almost double in 2017, from $662 million to $1.5 billion. You might very legitimately wonder at this; if a company that leads in its market cannot operate at a profit, then what sort of future will it enjoy as a generator of income? This is bound to have an effect on the performance of Spotify stock in the future. The answer to our original question might be: ‘Cautiously when you are quite certain that Spotify has found a way to stream music at a profit.
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