Respected investment bank GP Bullhound is behind the report that posits the idea that an IPO may not be the only option for the Swedish music service.
GP Bullhound runs several venture capital funds, and one of their biggest holdings is in Spotify.
“Our view on Spotify differs from many others, and we think it’s good increase understanding of the company. We follow them very carefully, as our fund is an owner,” says Joakim Dal, who wrote the analysis with Robert Ahldin and Per Roman.
When Spotify last raised capital in June 2015, the company was valued at about $8 billion. The value remains at about the same level today in the unofficial trading. But in its analysis, GP Bullhound argues that the value should be much higher.
The core of their argument is this: The number of new paying users grew over the past year, while the valuation of each new user went down.
“At the end of 2015, user growth was at 80 percent, but now it is approaching 100 percent,” Mr. Dal says.
On Wednesday, Spotify founder Daniel Ek announced that the service has now surpassed 40 million paid subscriptions. GP Bullhound predicts that this figure will increase to 100 million by 2020.
At the same time, the market value of Spotify has risen sharply, according to the analysis.
In their baseline scenario, GP Bullhound estimate that Spotify is worth $20 billion. But the investment bank also presents a “best case” scenario, which predicts even better profit margins and a higher market value for each share. This scenario places the market value of Spotify at $53 billion.
GP Bullhound predicts Spotify will have its IPO next year – that is, if Facebook doesn’t get there first. The study presents the possibility that Facebook might buy Spotify before an IPO becomes reality.
“Historically speaking, Spotify has been unsuccessful at building a social network around their service, so a deal with Facebook would be positive. It would provide a competitive advantage against Apple, which today has no social network tied to its service,” said Joakim Dal.
“Daniel Ek and Mark Zuckerberg know each other well,” Mr. Dal says. “If Facebook were to introduce a new product, music would be a likely choice.”
But an IPO is still likely. GP Bullhound estimates by the time that happens, Spotify will have a market capitalization of between $15 and $20 billion.
“An IPO is the most likely scenario. One reason is that the company today is so big that few can afford buy it, excluding Facebook and Google. Netflix serves as a good benchmark, which is always good for a listing,” Joakim Dal says.
Photos by Manu Fernandez/AP/TT and Ann Jonasson.