Any time a company goes public, investors begin to get out their dusty financial valuation models and begin placing a valuation on what the company’s stream of future cash flows should be worth at current levels.
Recent reports that the music streaming company Spotify intends to go public has spurred a significant amount of interest from investors, given the current favorability tech related stocks have seen in recent years. The highly touted FAANG stocks (Facebook, Apple, Amazon, Netflix and Google/Alphabet) have performed incredibly well in recent years, providing investors with outsized returns over the past five years, returns which have driven stock market indices higher as these companies continue to make up a higher percentage of the overall equity market given their importance to North American and global markets in recent years.
Spotify has a dominant position in its space, and while rivals such as Apple Inc. (NASDAQ:AAPL) continue to increase its presence in this space, recently agreeing to purchase Shazam, Spotify stands to earn a premium valuation at its initial public offering (IPO) which is expected to take place near the end of 2018.
The valuation Spotify will be able to achieve has been disputed, however reports that the company will fetch somewhere in the neighborhood of a $20-billion valuation upon its launch have invited skeptics and believers alike to debate the quality and size of Spotify’s cash flows in recent weeks. Whatever the case, as with other highly covered IPOs, waiting a few months before jumping in may be the way to go, given the penchant insiders have for selling shares in the early days to cash out (remember Facebook’s IPO?).
Invest wisely, my friends.
