A Leaked Financial Report Shows Spotify’s Losses More Than Doubling

Investors now ask themselves: Will Spotify ever become profitable? Probably not.

Is music streaming profitable?  Better yet, will an IPO help Spotify finally make sustainable revenue after ten long, arduous years?  Or will they face a similar Snapchat-like fate?

To gear up for their long-awaited IPO, the Swedish streamer has built an office in New York.  Spotify executives have spoken with top investment firms.  Morgan Stanley, Allen & Co, and Goldman Sachs have all reportedly counseled the company on the direct listing process.

On the content side, the streamer has also locked down two multi-year licensing deals with UMG and Merlin. Those deals would guarantee Spotify lower royalty payments.  In exchange, labels would have the option to lock down certain releases behind a two-week Premium-only window.

Despite growing revenue, however, Spotify has also reported steep losses.  Yesterday’s leaked financial report didn’t change things.  According to statements obtained by The Information, the Swedish streamer told investors to expect 2016 revenues at €2.9 billion ($3.1 billion).  This number represents a nearly 50% increase from 2015’s €1.95 billion ($2.2 billion).  Yet, the streamer also told investors to brace for huge losses.

Despite a huge increase in revenue, the company experienced annual operating losses of between €300 million ($333.8 million) and €400 million ($444.5 million).  In 2015, the company reported annual operating losses of €184 million ($205 million).

The leaked information comes days after Spotify received a new valuation.  Two years ago, investors valued the company at $8 billion.  After securing new long-term deals with two major labels, the company received a $13 billion valuation.

The leaked report comes at a crucial time for the company.  Instead of going through the traditional IPO process, Spotify will reportedly aim for a direct listing on the NYSE.  This move is not without risks.  Direct listings would make the company’s stock susceptible to sudden price fluctuations.  The Swedish streamer would also not have the ability to raise money by offering new shares for sale.  It would also lose the “lock-up” period.  This period prevents employees and early-stage investors from immediately selling shares after the company’s listing.

The report underscores investors’ worries over the company.  In fact, the losses prompted The Information to note the following.

“The wider loss spotlights longstanding questions about Spotify’s ability to turn a profit.”

If and when Spotify finally lands on the New York Stock Exchange, investors may ask themselves the same questions.  Should the Swedish streamer fail to address investors’ concerns about the company’s long-term viability, it may face a Snapchat-like fate.

Investors punished Snap’s stock after the company’s posted a dismal financial report post-IPO.  With falling user growth and flatlining daily active user numbers, investors had yet to see any real innovation.  Meanwhile, Facebook’s Instagram keeps stealing its users by copying features.  Snapchat has yet to respond with a killer feature.  In less than 24 hours following the post-IPO financial report, the company lost $6 billion in value.

As if that wasn’t enough, Snap currently faces a costly misrepresentation lawsuit from a former employee for defrauding investors.  The company allegedly inflated key user metrics to receive a higher valuation prior to their IPO.

Spotify has yet to confirm the validity of the leaked financial report.

8 Responses

  1. Emma Bell

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  2. music stowaway

    Here’s something to think about…

    The recorded music business just isn’t that big..
    To value a streaming company at $13 Billion is ludicrous..

    The major label content owners, the music arms of
    Universal, Sony & Warners aren’t worth anywhere near that much because the simple fact is, revenues in paid music consumption
    (i.e. downloads and streaming) is not that much…

    Major headline artists have to tour tour tour and do sponsorwhips
    in order to become multi-millionaires… (none are becoming
    billionaires our of recorded music revenues..).

    The fact is, the recorded music business is not really a big business
    when compared to the movie and television business or even the
    major league stadium business..

    So the figures that are being put around by bankers, private equity
    companies and share market commentators are fanciful and really
    are just like what happened with the tech bubble..

    Once again it’s profitless prosperity brought about by a bubble

    MySpace is an example of reality finally hitting the ground when it’s stock fell back into reality.. aren’t even that big

    • Apples&Oranges

      Snapchat had revenue of $400m and losses of over $500m in 2016 and was valued at roughly $20 billion when it sold non-voting shares to the public. Spotify had (according to this report) revenue of $3b and losses of 300-400m with a valuation of 13b. How are these at all comparable other than being tech companies?

      Also, while I think SNAP is doomed bc of Facebook, the stock closed at $20 or 17% ABOVE its IPO pricing at $17.

      If Spotify investors need to be wary of a “Snapchat-like fate” it would mean a 17% return and a valuation of $15.2 billion in three months. Not a bad return annualized.

    • Stoked

      Music Stowaway you understand that many tech companies lost significant money for years and still went public correct? Look at Amazon. Also why are so concerned about the stock market valuation of the company? The market can value the company however it likes and if people want to buy/ sell shares it will influence the price but it doesn’t necessarily reflect on the core business. Also, you keep repeating that Spotify wants to make massive amounts of money by going public, this is 100% false. Spotify as company will not make any money, they will spend money on bankers, lawyers and fees. It is the investors in Spotify that want the company to go public. This includes VC’s and employees. A direct listing allows the owners of Spotify stock liquidity and the ability to sell their shares in the public market whenever they want (M-F). If there are more sellers than buyers the stock price will drop.

      As far as your “profitless prosperity” I assume the hope is that with increased revenue and market share and lower royalty rates as sales increase, the company will become profitable. This is why the company is valued higher than its current profit. It is the value of expected future cash flows. It is a bet at the end of the day.

    • Ray Long

      With technology companies, the valuation isn’t based solely on the revenue: there’s also an assessment of the value of the intellectual property owned by the company, including patents, trademarks, etc.

  3. Yeah

    They should start charging people money to stream music

  4. Trevor C.

    Yes. Labels make money off streaming at least. Look at Spotify’s long term business plan and there is where the valuation comes in, essentially future cash flows. They may be making large outlays to enter new markets for example, but these costs may not be apart of a normal overhead in the future. I am curious if we might have to pay for music in the future, and if so, they will be well situated.