Ian Wyatt is pitching a “pre-IPO” opportunity in Spotify, the music-streaming business that is going public on the NYSE tomorrow… so what’s the story? Can you “get in early?” Should you want to? What’s this all about, anyway?
We’ve gotten quite a few questions slipped under the door here at Gumshoe HQ about this one, so I’ll try to get you some answers.
Here’s a taste of how this was promoted in the ads for Wyatt’s Million Dollar Portfolio ($795/year), in case you missed those ads:
“Spotify shares GO PUBLIC Tomorrow! That means this is your LAST CHANCE to buy ‘pre-IPO shares.’
“Your urgent IPO briefing starts in just a few minutes at 12pm ET / 9am PT- set a calendar alert RIGHT NOW.
“This is an EXTREMELY LIMITED situation you don’t want to miss!”
(And yes, in case you’re wondering, this is another of those “no refund” services… they say that it’s “satisfaction guaranteed,” but that guarantee just means that if you want to cancel you’ll get either a credit for other Wyatt newsletters, or you’ll get another year free — which is a frequent guarantee that I don’t understand: “It turns out that this newsletter is a terrible fit and was misrepresented in the ads and I don’t like it at all, so gosh, it’s great that now I get it for two years instead of one!”)
Newsletters love to tease “pre-IPO” opportunities, because it makes it seem like they have secret, insider access that they can sell to you, and they like to profess that they can provide inside access to the “little guy” (for a fee) … and they find a willing audience, because we are conditioned by the financial press to believe that IPOs are millionaire-makers that would let you bathe in $100 bills if only you could get in early.
So what’s the story? Can you really get access to Spotify before it starts trading tomorrow?
Yes. Sort of. As long as you want to buy a basket of other companies, too.
Wyatt says you can buy pre-IPO shares in Spotify and in other Silicon Valley companies, and that if you wait for the IPO you’ll pay 50-100% more for Spotify after it goes public tomorrow. And that might be true, we won’t know until it starts trading what the public valuation of Spotify will be.
That’s because Spotify is not actually having a traditional IPO — IPO stands for Initial Public Offering, usually used when a company wants to sell part of itself to the public to raise capital for expansion (or let early investors sell their holdings), and Spotify is really just listing its stock… though there will, of necessity, be some selling as part of that (otherwise, there wouldn’t be any shares to list).
So Spotify is not marketing themselves or selling shares to raise money for expansion, they’re trying to cut out the Wall Street middle man and avoid the underwriting process, and just take the shares that already exist and make it possible for their employees and their early investors to sell shares if they want to.
In the future, I imagine they’ll probably also do a stock offering if the shares trade at a good price — but for now, they don’t need the cash, so they’re going to let the market set the price. That gives them what their early investors and their employees want, which is liquidity for the shares they hold, but it means they don’t have to go through the process of trying to engineer a share price on day one that generates a “pop” for the underwriters and fat cats (IPOs are generally offered to the biggest or most valuable accounts), and they don’t have to pay nearly the fees that public offerings usually entail.
So the stock will essentially go public at an auction price that is determined by market makers based on the volume of buy orders they’ve received at the open — most brokers will open up SPOT for orders a couple hours before the market opens, and the market maker will come up with a price that generates good fills for all the insider sell orders they have in hand. And it will almost certainly be dominated by retail investors, since the institutions will probably mostly want to offer lowball bids until they see which way the wind blows (particularly since tech stocks are currently getting treated quite poorly by the market).
The price target for Spotify that Wyatt refers to obliquely is more than double the value on the private market, and from what I read that’s one reasonable interpretation, that SPOT could double over the next year (price targets are not for tomorrow, they’re generally for the next 12 months). This article, for example, notes that one analyst has a $220 price target and another puts it at $160, while the most recent private sales, probably by employees, were between $97-127.50 a share back in February.
This is not a tiny company that’s yet to grow into its opportunity, it’s a bet that a very large company will get much larger — if the price is around $200 when it starts trading, that would mean the company is valued at close to $40 billion. By way of comparison, Netflix (NFLX) was a $40 billion company as recently as 2016, when it had revenue of about $8 billion. MaMark Mahaney, the analyst who has that $220 price target, expects SPOT to have sales of $8.3 billion in 2019… so we’re getting a story, at least from those who are bulls, that this is very much a “Netflix for music” stock, and deserves a similar valuation.
Wyatt has pitched these kinds of pre-IPO investments before, including the failed Facebook clone Renren (RENN) that turned itself into a fintech venture capital investor (that’s down from about $18 to $8 in four years), as well as, just last Fall, a pitch that also referenced Spotify back in September.
And, it turns out, that was reasonable timing for a couple of the publicly traded investment funds that own Spotify shares — Firsthand Tech Value Fund (SVVC) is up about 40% since then (most of that was returned to investors in the form of a special dividend at the end of the year), and GSV Capital (GSVC) has essentially the same return. T
hat has really helped both of these venture capital funds to emerge from the doldrums they were stuck in back in 2016, when there was a dearth of “animal spirits” in the market and a shortage of IPOs to get investors jazzed up about buying “pre-IPO” stocks… but, of cour