Spotify financial analysis

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there was no financial analysis attached. I had expected to see a comparable analysis along with a detailed DCF analysis. Take a look at the lecture and the attached materials I presented last night. Would strongly urge you to complete the case study and answer question No. 4:

Using the information provided, what should Spotify’s shares be trading at on the first day of its listing? Would you recommend that Ms. Wang invest in Spotify? If so, at what price and investment horizon? For the Discounted Cash Flow analysis, assume a beta of 1.17, a Risk Free Rate of 2.85%, a Market Risk Premium of 5% and that after the offering, the Company will not have any debt (since the convertible debt will be converted to equity). For purposes of this question, limit your investment analysis to the DCF method and the Comparable Company method.

This will involve detailed financial analyses.

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Assignment Questions:

1. Assess the current economic and market climate (as of the date of the planned IPO).  Assess the music streaming industry.  How is Spotify disrupting the industry?  What are some of the key success industry factors?

2. Evaluate Spotify’s past financial performance.  What are some of the takeaways from your analysis?

3. What are the differences between a traditional listing and the direct listing being pursued by Spotify?

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Running head: Case study 1 The music streaming industry is known to be comprised of various organizations that offer non-physical audio playback through the internet, these indeed does not accommodate the satellite radio broadcast or even the music downloads. Its major income sources are from the paid subscriptions and the adverts it does have sales. The publishers, record labels, artists and aggregates are seen as the main suppliers to this industry and they are very vital for the progress and growth of the industry Assessing the music industry, there have been research done continuously to determine its impact globally. A report which was titled as “Music Streaming Market” which has the music streaming analysis of 2013-2017 and the forecast of the market for 2018-2026. Over the years, there has been an upsurge in the music streaming which could have been contributed by the increase in the digitalization plus the cumulative acceptance of digital music. In 2017, the music streaming market value was US $6423.6 million which was projected to experience significant growth to reach US $33489.4 million come the year 2026. This growth is attributed by the increasing internet speed globally with decreasing charges of internet rates. Spotify is a music gushing phase formed by Swedish organization Spotify AB, headquartered in Stockholm, Sweden and chronicled on the New York Stock Exchange. Propelled on 7 October 2008, it is presently accessible in 78 nations and areas all through the world. It gives DRM-shielded constituent from highest marks and media officialdoms. Spotify is a freemium benefit; vital highlights are allowed with signs or programmed music recordings, while further highlights, for example, improved gushing superiority are presented by means of waged memberships. In this report, PMR has fragmented the worldwide music spilling market based on kind of gushing, end-client, content sort and district. By kind of gushing, the market is sub-fragmented into rough live spilling and on-request spilling. With the expanding presentation of sound music spilling applications, offering propelled highlights with its membership-based music gushing applications, end-clients over the globe have begun embracing on-request music Case study 2 gushing administrations. Be that as it may, attributable to the nearness of enormous group of onlookers over YouTube, a significant piece of the pie is held by live gushing portion too. One of the ongoing improvements saw over this section, is the presentation of membership-based YouTube music gushing alternative. This, thus, is relied upon to drive the development of onrequest music spilling portion. In light of end-client, the music spilling market is sub-divided into private and business. The developing purchaser extra cash and expanding selection of cutting-edge buyer electronic gadgets, for example, cell phones and workstations over the globe, particularly crosswise over creating nations, for example, China, India and so forth are a portion of the central point driving the development of private sub-section, in the worldwide music gushing business sector. What's more, inferable from the confined selection of music gushing crosswise over business fragment, a similar section is, in this way, expected to witness a relatively lower CAGR, in the worldwide music spilling market. The music streaming now is accountable for 75 percent of the total income collected by those in music industry. In comparison with other means, streaming is making much money the available digital downloads, licensing deals and physical CDs combined. When one talks about streaming in these contexts, it means the paid subscriptions to the services such as the Tidal and Spotify, the digital radio broadcasts and VEVO for the video streaming services. This broad category made at least $3.4 billion in the year 2018 which this total amount stands for the 75 percent of the total music revenue collected by that particular time of the year. This is expected to grow in the future with more people being able to access internet at the very comfort of their homes and also being able to afford internet at a very free cheaper rate. The revenue generated thus will significantly increase, with more sharing amongst the subscribers Case study 3 will be able to attract their friends and family members to be part of the Spotify music streaming services in order to be able to access, download songs of their favourite times since there is a larger collection music in this site of the company as it has been able to collaborate with many labels to ensure its success and growth amongst its competitors in the music streaming industry. The figure below shows the contribution of various methods to the total revenue of the industry. From the figure above, streaming music has been the most popular and has contributed to a higher percentage of revenue. This shows how effective it is to the music industry. With the new rate of streaming being around one million subscribers per moth who are streaming, though it is a small number of individuals in comparison to those who listen to music but even so, this number is more likely to grow bigger and better as compared to the recorded music business. A report which was titled as “Music Streaming Market” which has the music streaming analysis of 2013-2017 and the forecast of the market for 2018-2026. Over the years, there has been an upsurge in the music streaming which could have been contributed by the increase in the digitalization plus the cumulative acceptance of digital music. In 2017, the Case study 4 music streaming market value was US $6423.6 million which was projected to experience significant growth to reach US $33489.4 million come the year 2026. This growth is attributed by the increasing internet speed globally with decreasing charges of internet rates. This figure shows that the number of subscribes do increase with time over the year which is a wonderful achievement by streaming, even though the number do speak so, this has come with its own challenges that enable the streaming to be at such level. One of the challenges is find the audience for a music with many different channels competing for the same number of customers in the market is very critical for the success of the streaming music to the industry. As per PMR examination, expanding mindfulness against the selection of pilfered substance, high development openings crosswise over creating nations and expanding foundations of new music spilling specialist co-ops are probably going to build income and new advancement procedures to empower music gushing producers to achieve new development markets. A portion of the market members in the worldwide music spilling market report incorporate Case study 5 Apple, Google, Spotify, Deezer, Pandora, SoundCloud, JOOX, Amazon Music, iHeartRadio, and TIDAL. After 10 years of it being found, Spotify has turned to be a force to be reckoned within the music industry. At the current time, Spotify has got more than 159 million active viewers or users of the platform but has more than 71 million monthly subscribers. Those who have not subscribed do listen to the ads available in order to be able to access the free music they wanted to hear. The revenue collected by Spotify in the last year financial report was $ 5 billion which is a good revenue for a firm in this music industry. When compared to other streaming services, Spotify has the highest number of subscribers in contrast to Apple Music which have got only 36 million subscribers. Spotify disrupt the market heavily as it is that the streaming services holds up the key to make or break any given artist in the music industry and also the kind of support that an artist receives whenever he or she want to build their careers and promote them, also on how they can promote their creative works in the music industry. The labels have since failed due to this disruption from the streaming firms and thus these firms take control of the industry and how an artist turns up to be in the industry over a period of time. Due to the heavy competition from the three big technology companies, Spotify has been able to get into contract with many labels with the top music companies in order to block the other competitors. The other three companies which are Google, Apple and Amazon do have some other means to leverage their revenue loss from the music streaming. Apple is able to leverage this by selling more iPhones which will make its overall profit in the long run. For the case of google, it can be able to extend its market dominion by marketing more of the google play music all access thus being able to curb the loss if any can occur. For Amazon, it can use Amazon music to sell more of its music or everything of it. With Apple being the main threat and very strong competitor of Spotify, they products are inferior with only 20 percent share of the market but when one look at Spotify, it Case study 6 is available everywhere, this can be supported by the many subscribers in the market as compared to Spotify which has many subscribers. The market was also disrupted by Spotify as it was quoted by DJ Gareth Emery who said that he could not rely on Spotify for his personal income since it takes over a year or even a period of two years for an artist to get paid, even though from the site DJ Gareth Emery has got a record of 1.1 million subscribers monthly but he stress on the fact that many of the artists do only get a crumb from the table and wonders how many smaller artist are able to manage their upcoming businesses and career growth. Another disruption is when the labels who are suppose to promote these artists have failed and these promotion jobs being left in the hands streaming industry firms which does not favour all the artists and making the upcoming artists having to work extremely hard and even take short deals to be okay with them. In light of substance type, the music spilling market is sub-fragmented into sound gushing and video gushing. The minimal effort related with the ads displayed over free video music spilling applications, for example, YouTube, particularly in Asia Pacific locale, in contrast with free sound music gushing applications, is one the factor owing for the limited market an incentive in the worldwide music gushing business sector. Likewise, expanding volume of sound music spilling administration endorsers internationally, complimented by the high costs related with the membership over all real sound music gushing applications, for example, Apple, Spotify, Amazon Music and so on., has been a noteworthy driving variable for the sound spilling fragment. Moreover, based on geology, the North America music spilling market is relied upon to command the worldwide music gushing business sector because of high appropriation of computerized music in the U.S., accessibility of assets for offering propelled music spilling Case study 7 background to the end-clients, and high discretionary cashflow of the end-clients, in the district. The district has seen the reception of cutting-edge information administrations, for example, continuous 4G and fast broadband network since the previous four years too. These variables are fuelling the development of the music spilling market in North America. In addition, the music gushing business sector has high potential in SEA and Pacific and China attributable to the expanding selection of free music spilling applications, for example, JOOX, Saavn, Gaana and so forth. Some of the key success industry factors are: Threat of entry: the seriously threat that new firms do have of entering a new market can be low in this sector, for they have to acquire same catalogue comparable to those that are provided by the established music streaming services, to make things more complicated, most of the established firms have already had a large number of very active subscribers thus enjoy the economies of scale from their large market coverage. These new firms in the music streaming industry have to build a better working relationship and this will make them settle for a much lower bargaining leverage as compared those established firms. Access to supplies: the major firms in this industry do have their suppliers ready, these suppliers have a bigger market share and control, they know how to negotiate a deal and how to market artist. Customer Acquisition: The very growing number of active users and their high demand is known to contribute to the better quality of music streaming services and provides the economies of scale advantage, through the sharing and communications in these platforms, the firms get more individuals being their being their viewers and thus being able to outdo their competitors. Case study 8 From the previous Spotify financial performance, the findings or the take away from it were: Investors tend to like the business model of Spotify: from the very earlier tests that were done of music business showed that the market had mixed reactions and these led to more losses and changes in the music industry, like in the year 2005, the initial public offer of Warner music had to fall by a 7 percent on their opening, `warner music is the third largest record label in the music industry globally. In the year 2011, the online radio group pandora initial public offering was extremely buoyant debuting at double the expected valuation but over the year the company have been making losses and losing large sums of money year after year. Then with the online music streaming has seen the US music sales seriously jumping a record 17 per cent which is the fastest growth pace recorded in the past 23 years, this solid Spotify market debut with a whooping $ 26,5 billion end of the day market value shows that several investors are thus convinced that the music streaming works well and it is the best direction to go. It is capable of a better like in the public but not as much as the love for Netflix: Spotify has greatly and magnificently tried its potential investors that it can seriously imitate the successful path that had been taken by Netflix. Netflix have become on of the successful stocks as it is famously known to rival Hollywood in order to have its share of the market. It has a strategy of sacrificing margins for growth in users. There was change in the management with Barry McCarthy joining Spotify in the position of Chief financial officer in the year 2014, he was the one who led Netflix successfully in its initial public offer then later joined Spotify. The major question in the mind of investor id the valuation of Spotify in relation to Netflix in which they tend to offer almost the same type of subscription to their subscribers in the terms of either monthly subscription or yearly subscription. But from Spotify listing of first day in trading, its enterprise value is almost four times of what is expected return in the year 2019 while that for Netflix is seven times which is way better. This can be attributed to the strategy which Netflix has used of raising its prices without being able to lose many of its faithful customers which is Case study 9 a strategy that Spotify are yet to test to test the market reaction even though they have a bigger market of the number of their subscribers is also way high as compared to their competitors in the music streaming industry. Netflix has more and better-established public record which for the case of Spotify only time can proof this case. An IPO wants to raise money, in this method, a company or a give firm is able to obtain money from investors without having to pay for their interests, the only things that the investor do ask for is the share of profits in the company if any exists but will also have a stake in the company. A direct listing raises no money, with these two in place, the fundamental difference between initial public offering and direct listing is only money, one deals with raising money in the form of capital while the other one does not raise money. How Spotify direct listing tend to differ with an initial public offer is that, its direct listing is different from the IPO because Spotify is doing both the offering of shares and listing without acquiring banks help at the same time. Direct listing is when banks helped by underwriting the offer which simply means that they were setting a price for the shares for the buy or sell during the first selling which helped to control the prices to keep them from being too volatile. This happened because the company did not want to raise any capital since the company is a cash flow positive, since the company itself and what is engages in is well understood worldwide, Spotify executives doesn’t spend much of their time to explain the firm to any investors outside there about the company which is a bonus to the company. Many a pennant significant IPO rip snorting telling commerce mercantilism through which the concern and its representative ordinary an opening in offering significance, the revolutionary York accumulate rotation routine a pertinence use late on the engagement before listing supported informal, personal commercialism of Spotify’s shares. The orders controlled by the progressive York aggregate alternation distance foreigner broker deals and a deputed exchange maker’s determination of wherever get and sell orders might be matched. Spotify’s shares Case study 10 closed at $149.01 per apportionment at the drop of a hat its first major of commercialism. The bank will help to reduce the gap which is created by the massive volatility in the market by setting a suitable price for the stock without much challenges since banks are so familiar with the market and the various that occur in the market. Prior to the direct listing, there was no public marketplace for Spotify’s stock, though shares did exchange personal marketing transactions. The direct listing method enabled Spotify to create its shares obtainable to a far wider market. By utilizing the direct listing method, Spotify avoided paying important banker fees and therefore the time and expense of a show. From a pre-IPO stockholder perspective, they were able to avoid the lock up amount that insiders are usually subject to during an ancient commerce and additionally avoid having their shares diluted. While this direct listing method could seem like abeautiful various for different school corporations trying to travel public, potential issuers have to be cognizant of Spotify’s distinctive circumstances that enabled it to travel public utilizing this non-traditional path. additionally, as Spotify noted within the risk factors section of its prospectus, by following a right away listing the giving failed to have the identical safeguards as AN underwritten initial public giving, that might end in the worth of its shares being volatile and declining considerably following its listing, or the failure of a vigorous, liquid and orderly marketplace for its shares to develop and be sustained. It's not as if investors are completely removed of the procedure. Regardless they'll make countless dollars in warning expenses for what is, somehow or another, an all the more difficult assignment. Case study 11 Morgan Stanley, for example, contacted practically all Spotify investors in the course of the most recent month or so to check their enthusiasm for moving stock, as per individuals acquainted with the procedure, and all the more as of late started similar discussions with organizations keen on purchasing Spotify shares. That work hypothetically will help Spotify comprehend what will happen to the organization's stock at different value levels. The other goal of financiers exhorting the arrangement, the general population state, is to ensure there is a sufficiently high volume of offers exchanged to protect the organization against extraordinary unpredictability. Since Spotify isn't by and large expertly "valued" the day preceding exchanging, its offers could move around fiercely in the opening times of exchanging — which is relied upon to start late morning on Tuesday. One reason that banks like Morgan Stanley have a challenging situation to deal with: Spotify financial specialists and workers have had huge amounts of chances throughout the most recent decade to move their stock. The organization has been tolerant of private stock deals to a strange degree, implying that Tuesday isn't the discharge valve for investors who long felt shackled — that is relied upon to temper the auction. The immediate posting is another chance to do what they've generally been allowed to do. Actually, about $500 million in Spotify shares have been exchanged throughout the most recent couple of weeks ahead of the pack up to the immediate posting, the general population acquainted with the procedure state. Those exchanges occurred at offer costs that esteemed the Case study 12 organization between about $22 billion and $25 billion. That receptiveness to private exchanges is one of a few extraordinary conditions that permits Spotify to do what other privately-owned businesses haven't possessed the capacity to do. Spotify says it doesn't have to make and pitch new offers to fund the organization, which most organizations can't comparably say. It has an enormous, prominent purchaser mark that will speak to mother andpop retail purchasers. What's more, the previously mentioned stock exchanges make it simpler to appraise how the organization will cost. With the goal that's the reason a few naysayers place that regardless of whether Spotify's immediate posting succeeds, it won't introduce an ocean change in how the standard IPO unfurls. It's an ideal tempest of conditions that makes it conceivable — for one specific organization at one specific time. Yet, new companies will at any rate presently think about different alternatives — actually, that is genuine regardless of whether Spotify's immediate posting isn't made a decision by history to be fruitful. Organizations currently realize that there is space for rebuilding in the IPO, and that is as of now a misfortune for the officeholder, the managing an account industry. The three reasons why Spotify did chosen direct rather than IPO according to EK was for the following reasons: Straightforwardness. "One thing about the customary procedure — which was done during the 1970s — is clearly the world has changed a great deal," Ek said. "It simply didn't sit well with me to put out this record in this day and period when data is [fingersnap] like this and you can't remark on it, you can't say anything regarding it until the minute where you ring the chime and open up to the world. I needed to check whether there was an approach to push more straightforwardness with the goal that we could really be open and could recount the story much in an unexpected way." Case study 13 Break even with access to data for forthcoming investors. In principle, Ek clarified, everybody ought to have a similar data. "What really occurs by and by is you do this tranquil street show and give a few people somewhat more data, and after that you open the entryways and expectation that those individuals will at that point hold your stock. What's more, I would not like. I needed everybody to have the very same data." Ek would not like to place anybody in an alternate vessel. "Frequently what happens is that the financial specialists get the chance to move from the get-go; the workers don't. I didn't need that by any stretch of the imagination. I needed everybody to have a similar chance to move — or purchase, coincidentally — Day One." A comparable company analysis is a process which is used to evaluate the real value of a given company using the measuring metrics of the other businesses of the similar size within the same industry. Discounted cash flow analysis is an intrinsic value approach where an analyst is able to forecast the firms free cash flow into the near future and then is able to discount it back accordingly to the present-day company’s WACC. For the Discounted Cash Flow analysis, assume a beta of 1.17, a Risk-Free Rate of 2.85%, a Market Risk Premium of 5% and that after the offering, the Company will not have any debt 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐸𝑞𝑢𝑖𝑡𝑦 = 𝑅𝑓 + 𝛽 × (𝑚𝑎𝑟𝑘𝑒𝑡 𝑟𝑎𝑡𝑒 𝑜𝑓 𝑟𝑒𝑡𝑢𝑟𝑛 − 𝑅𝑓) 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐸𝑞𝑢𝑖𝑡𝑦 = 2.85/100 + 1.17 × (5/100 − 2.85/100) Hence the cost of equity turns to be 5.85% which is the cost of equity for Spotify company. Case study 14 REFERENCES Vonderau, P. (2019). The Spotify effect: digital distribution and financial growth. Television & New Media, 20(1), 3-19. Case study 15 Sun, H. (2019). Case Study—Spotify. In Digital Revolution Tamed (pp. 135-170). Palgrave Macmillan, Cham. Haampland, O. (2017). Power Laws and Market Shares: Cumulative Advantage and the Billboard Hot 100. Journal of New Music Research, 46(4), 356-380. Ferm Almqvist, C., Ekberg, N., & Leijonhufuvd, S. (2018). Spotify as a case of Musical Bildung. Popular Communication. https://www.theverge.com/2018/9/20/17883584/streaming-record-sales-music-industryrevenue Swanson, K. (2013). A Case Study on Spotify: Exploring Perceptions of the Music Streaming Service. MEIEA Journal, 13(1). https://hbsp.harvard.edu/import/594727 coursepack information Synopsis In early April 2018, Spotify Technology SA (Spotify) planned a rare direct listing on the New York Stock Exchange (NYSE). Unlike with typical IPOs, which used investment banks as underwriters to help set an IPO price, Spotify’s direct listing would allow market participants to determine the initial price. In a typical IPO, investment banks shopped the potential offer to various clients and, in the process of book building, determined a range for the offer when it started trading. They also often provided support for the issue on the day it started to trade, limiting the downside for shareholders if demand was low. In Spotify’s case, the investment banks were only being paid a nominal fee, and Spotify was not raising capital in the offering. The stock simply started trading on the prescribed day. In the case, a portfolio manager, Ms. Jennifer Wang, with a hedge fund that focused on growing technology companies was considering investing in the firm, but faced a challenge: how could she estimate Spotify’s value when it started to trade? Learning Objectives This case focuses on a disruptive and well-known technology firm that is proposing to also disrupt the typical underwriting process. The focus is on valuation that makes use of public information, some company guidance, and independent assessments, rather than valuation based on commentary and book building provided by underwriters, as in traditional IPOs. Assignment Questions: 1. Assess the current economic and market climate (as of the date of the planned IPO). Assess the music streaming industry. How is Spotify disrupting the industry? What are some of the key success industry factors? 2. Evaluate Spotify’s past financial performance. What are some of the takeaways from your analysis? 3. What are the differences between a traditional listing and the direct listing being pursued by Spotify? 4. Using the information provided, what should Spotify’s shares be trading at on the first day of its listing? Would you recommend that Ms. Wang invest in Spotify? If so, at what price and investment horizon? For the Discounted Cash Flow analysis, assume a beta of 1.17, a Risk Free Rate of 2.85%, a Market Risk Premium of 5% and that after the offering, the Company will not have any debt (since the convertible debt will be converted to equity). For purposes of this question, limit your investment analysis to the DCF method and the Comparable Company method. NOTE: ALL OF THESE ASSIGNMENT QUESTIONS SHOULD BE ANSWERED AS OF APRIL 2018----NOT NOW! Try not to look at what actually happened! The answers to these questions should not exceed 15 pages, double spaced, excluding references. All responses should be limited to information available as of April 2018 and not include any information beyond that date. Your responses are to be prepared using the APA writing style and guideline for references format. They must contain a bibliography and all direct quotations and data sources must be properly cited. More information on the APA style can be found in the course syllabus.
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Explanation & Answer

Attached.

Income Statement
All numbers in thousands
Revenue
12/31/2018
Total Revenue
1,073,229
Cost of Revenue
476,962
Gross Profit
596,267
Operating Expenses
Research Development
230,674
Selling General and
457,513
Administrative
Non Recurring
Others
Total Operating Expenses
1,165,149
Operating Income or Loss
-91,920
Income from Continuing Operations
Total Other Income/Expenses
27,367
Net
Earnings Before Interest and
-91,920
Taxes
Interest Expense
Income Before Tax
-64,553
Income Tax Expense
Minority Interest
Net Income From Continuing Ops
Non-recurring Events
Discontinued Operations
Extraordinary Items
Effect Of Accounting Changes
Other Items
Net Income
Net Income
Preferred Stock And Other
Adjustments
Net Income Applicable To
Common Shares

12/31/2017 12/31/2016 12/31/2015
673,304
389,330
205,233
293,051
179,835
91,978
380,253
209,495
113,255
73,290

37,858

290,775

171,536

90,320

-

1,834
426,495
-37,165

2,833
222...


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Just what I was looking for! Super helpful.

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