Investors love the idea of a “back door” — they want to be able to get in on something before everybody else, to get a taste of the big time without having to wait in line behind the velvet rope — and Wyatt Investment Research is using that notion to help convince people to subscribe to Ian Wyatt’s Million Dollar Portfolio ($495/year is the current discount price, though here they’re pitching a four-year deal at $995).
Wyatt has used this “backdoor IPO” or “secret IPO” pitch before — and similar teases come in from other publishers whenever there’s any feeling about a “hot” IPO coming that investors might want to get a taste of. He ran a similar ad before the Snapchat IPO early this year, for example (I didn’t write about that one), and we’ve seen plenty of past pitches that hinted at getting in early on IPOs like Facebook or Twitter… or buying in well before an IPO is even announced in the case of “big name” and persistently private firms like Palantir or Uber.
So what’s the hook this time? Mostly it has been connected to Netflix in the versions of the ad I’ve seen — either “buy this company that Netflix invested in” or “buy the next Netflix”, with those two references being to Spotify (which is a subscription streaming service for music, kind of like Netflix is for TV and movies) and Roku (which started as essentially a Netflix spinoff that makes hardware to stream video, roughly similar to the Google Chromecast, Amazon Fire Stick or Apple TV, though they also sell content and advertising on their streams), both of which are likely to be publicly traded soon.
The story about Spotify, from Wyatt’s “webcast” ad, is that it’s a great company that’s bigger than competitor Apple Music, with 140 million users — 50 million of which pay $10 a month, giving Spotify annual revenue of $3 billion.
And he says that Spotify is looking to do a “direct listing” instead of an IPO, which is certainly a possibility — there was a WSJ article about that on April 9, it would essentially mean that they only list their existing shares, without the “O” part of the IPO (since they don’t need money, they wouldn’t sell any shares — which would save a lot of money in fees, because they wouldn’t need underwriters and wouldn’t have to pitch themselves to potential institutional buyers).
Functionally, though, it’s pretty much the same for us small individual investors — we wouldn’t get an allocation to a hot IPO offering anyway, we would most likely just have to decide whether or not to buy the shares once they’re trading. The shares were last “formally” valued at $8.5 billion, but that was two years ago in their last venture funding round, and the company is likely to be valued at somewhere between $10-13.5 billion according to the estimates I’ve seen. That’s more or less what Wyatt says in his presentation, too.
There’s a more recent update on the Spotify “direct listing” plan, which scares Wall Street and has regulators paying close attention — you can see some more recent commentary on that from Bloomberg a few weeks ago here.
Wyatt talks about the rumor that Spotify will be listing as soon as September, which I suppose is possible, and they’ve got all their ducks in a row now (principally that means they’ve signed long-term licensing deals with all the major music publishers, with the most recent one being Warner Music in late August)… and they are the least worrisome of the streaming music companies, with a lot less drama than Pandora or Soundcloud, and with a strong and growing paid user base.
It’s still a challenging model in some ways, but so is Netflix — and that has worked out pretty well. The challenge is that a huge percentage of revenue has to go to the content owners in the form of royalties, and to cover the costs of hosting and providing seamless and high-quality streaming, so there isn’t anything left over for investors. That’s probably OK as long as growth is rapid, which it has been (they’ve tripled the paid user base in a few years), but it means that future growth sentiment and some analysis of the scalability of the business will be the key determinant of their success, not proven economics or profits — the per-song-played royalties are not going to drop as they grow, so they need a much larger revenue base with more users to let that small gross margin (the difference between the cost of the music and the amount they’re receiving from subscribers) be enough to cover R&D, reinvestment, overhead and, someday, profits.
And while not selling shares in an IPO is positive for shareholders, since it keeps the share count down, it’s still true that the point of a public listing, for relatively mature tech companies, is twofold: Raise lots of cash to grow (not so many of them need to go public for that these days); or provide a liquid marketplace for shares of your company so that employees can sell, since stock is a huge part of compensation for tech companies, and salaries alone are not often enough to sustain someone living in silicon valley, which is among the most expensive environments in the world. (Though it’s a catch-22, of course, it’s the crazy compensation that has made silicon valley so expensive, another case of basic economics — too much money chasing too few homes and too few providers of basic services).
That’s a general “tech stock” comment, by the way, not Spotify-specific — Spotify is not really a silicon valley company, their headquarters are in Stockholm and their big US center is in New York, in one of the new World Trade Center buildings… also not cheap places, to be sure.
So even if they don’t sell shares in the offering, I expect there will be a steady stream of insider sales as soon as that is a possibility. Not necessarily negative, but public listings exist to provide liquidity and it’s almost certain that employees will take advantage of that.
And the other one, Roku, is pitched by Wyatt as the “the tiny IPO that could crush Comcast and DirecTV” — which will always result in cheers, because everyone hates their cable company. The list of “most hated companies in America” is always a who’s who of cable and telecom.
Roku is a provider of streaming video hardware and software, Netflix was their early funder and spun them out so they wouldn’t be competing directly with Apple TV and Google Chromecast and the like. Like all streaming hardware, Roku works with Netflix and Hulu and all the major providers (though Google, Amazon and Apple add on their own proprietary stuff to their hardware as well). They have 15.1 million users, have raised $208 million, and Wyatt says they have an estimated valuation of $1-1.5 billion.
Wyatt also says that documents they’ve filed with the SEC are incomplete so far, but the rumor is that the IPO will happen within the next few weeks. This will likely be a “real” IPO, with the company raising money for growth, but we’ll see.
What Wyatt is pitching is not direct access to Roku or Spotify, but that “back door” or “secret” access… so how do you build