Spotify may be a great company, but there is a lot of uncertainty around the opening trade.
The music and video streaming company is set to go public Tuesday in what is the first direct listing of a company at the NYSE.
That means there will not be some things IPO veterans are used to seeing:
1. There will be no new shares floated. All the shares being sold will come from existing shareholders.
2. There was no roadshow, though they did have an investor day that was live-streamed on March 15.
3. It is not being underwritten. No bank will be buying shares from the company and then selling them to the public, as is typically done in an IPO, so there will be no initial "price." There is no bank with any skin in this game.
4. There is no book. No one is soliciting orders to buy and sell shares at the open, as is typically done by a bank in an IPO.
5. There is no lockup. Almost all of the shares will be available to trade.
What's this all mean? It means trading is likely to be a lot more volatile than usual.
"No one has been down this road before," John Fitzgibbon, who has been covering IPOs for decades at IPOScoop told CNBC. A handful of direct listings have occurred on the Nasdaq but they were small and nothing like the size of Spotify, he noted.
While Spotify is a well-known name, the mechanics of the stock sale are a bit tricky. "The real buyers are usually the institutions, and they want some control in terms of the amount they buy and the price range, and they are not going to get that," Fitzgibbon said. "They will want to buy X number of shares in a certain price range, and there is no guarantee they will be able to do that."
Traders are asking a few questions.
Where will it price? This is the tricky part. In the absence of a book, the opening price will be determined by orders from broker-dealers, and there is no bank that is under any obligation to "stabilize" the price.
Another issue: trading in the gray market doesn't mean much. Like most large tech companies that are not yet public, Spotify does have a small amount of shares that trade in private transactions. Unfortunately, you could drive a truck through the recent range: $48.93 to $125.00 from Jan. 1 to March 14. Little wonder that Renaissance Capital, which provides valuations of IPOs to institutional clients, wrote that "Spotify could be worth $25 billion. Or $9 billion." It's last valuation, a Series G private round in 2015, valued the company at $8.5 billion.
While there is no "underwriter" in the traditional sense, Spotify has hired some bankers to act as consultants, including Morgan Stanley. It's expected that they will issue a "reference price" that will be based on trading in the gray market as well as fundamentals. No one knows if this will matter.
What about fundamentals? Again, tricky. The company is still unprofitable, and there is no obvious publicly traded peer to compare it with. Spotify gave guidance on Monday, estimating they would have as many as 96 million paid subscribers by the end of 2018, up from 71 million in 2017, with revenue of $6.6 billion, 30 percent above 2017 figures.
Atlantic Equities initiated coverage with an overweight rating and a $160 year end price target today, but they made no comment on how it might open or trade initially.
It will price where the interest is. This is going to look like a Dutch auction. The price will be reduced until buyers are found, except no one knows how much stock is going to trade.
It appears that almost all of the shares will be available to trade. There are 178 million ordinary shares outstanding. With the exception of a small amount held by Tencent Music Entertainment and Tencent, most of the shares (north of 90 percent) will be able to trade immediately.
So, what will happen once the shares start trading? We have no idea. You can argue that because no new shares are being issued, and this is a well-known company with significant retail interest, the price will rise. But you can also argue that the large number of shares available to trade may surpress any price gains. Spotify itself says they have no idea, but warns: "[T]he public price of our ordinary shares may be more volatile than in an underwritten initial public offering and could, upon listing on the NYSE, decline significantly and rapidly."
The stock certainly will not open early. The price discovery process is likely to take a long time. How long? I don't know, but I am betting we will be eating lunch by the time it starts trading. It definitely will not be 9:45 a.m.