Spotify Roars Into the Public Market

Spotify Technology SA SPOT 12.89% roared onto the public market Tuesday, cutting a new path to public ownership that could alter the way companies think about the listing process and pose a new threat to a core business on Wall Street.

Shares of the music-streaming giant surged on the first day of trading, closing at $149.01 and giving the company a market value of $26.54 billion. That ranks Spotify as the eighth-biggest technology initial public offering after the first day of trading, just behind Google in 2004, according to Dealogic.

To go public, Spotify executed an unusual move called a direct listing, forgoing investment-banking underwriters and opting not to raise any money for itself. In the process, Spotify saved tens of millions of dollars in fees while still giving its employees and early investors the chance to cash out.

That a company so large was able to mark a win for its investors through such a listing could lead more firms to opt for that route. Dozens of venture-backed companies, flush with cash, remain on the sidelines as they haven’t had to tap public markets, but may want to do so to allow employees or investors to cash out.

The New York Stock Exchange, which worked closely with Spotify over the past year to enable the unorthodox listing, received a number of inquiries from companies about the direct-listing process in the run-up to Spotify’s debut, NYSE Group President Tom Farley said Tuesday.

“Now that the dust is settled, I’m looking forward to going back to those companies and finding out where their heads are at,” he said in an interview on the NYSE’s floor, soon after Spotify shares began trading. He described Spotify’s debut as “very smooth.”

“Spotify’s public debut wasn’t without its hiccups, however from the early indications we would count the company’s direct listing experiment as a success,” said Cameron Stanfill, a venture analyst at PitchBook.

Wall Street’s banks still made money on Spotify’s offering—just not nearly as much as they would have if the company had done a traditional IPO. For its listing, Spotify hiredGoldman Sachs Group Inc., Morgan Stanley and Allen & Co. as advisers and paid them about $36 million in total fees. Snap, which was similar in size during its March 2017 offering, paid nearly $100 million to its large team of underwriters.

After an extensive price-discovery process—Spotify had the latest NYSE opening in recent memory at 12:43 p.m.—its shares burst onto the markets with a first trade at $165.90.

The stock wore lower as the day went on, closing $16.89 below where it started. Still, even with the afternoon slump, the stock closed well above its highest private-market trading levels, which were recently at $137.50, according to people familiar with the trades.

It also landed 13% above its so-called reference price of $132, which the NYSE set as a placeholder for trading systems to use in lieu of a formal IPO price.

Around $940 million worth of Spotify shares changed hands in the first trade Tuesday. According to NYSE data, that was the fourth-largest opening trade in a company going public since 2010.

Chief among concerns around Spotify’s listing were that trading could be turbulent or potentially locked up because of a lack of buyers and sellers at the right price points, and that there was no investment bank in place to provide buying support if shares declined, as is typical in a normal IPO.

Spotify’s debut wasn’t as volatile as some market observers had feared—although its stock did trade in a wider range on its first day than other big tech companies that held conventional IPOs, such as Snap Inc.

“The direct listing was untested at this scale and profile, but it worked and worked well,” said Colin Stewart, vice chairman of global capital markets and head of technology equity capital markets at Morgan Stanley, which executed trading for the majority of the shares in Spotify.

Still, the next few days will be a test of whether trading will remain orderly.

Spotify’s executives didn’t come to the NYSE to ring the opening bell, with Chief Executive Daniel Ek writing in a web post this week: “Normally, companies ring bells…Spotify has never been a normal kind of company. ”

But the trading floor was still buzzing, as at least 20 floor brokers swarmed around Citadel Securities’ senior-designated market maker Peter Giacchi, who periodically shouted out the latest pricing information on the stock.

At the same time, a team of bankers and traders at Morgan Stanley was determining interest from buyers and sellers and relaying it to Mr. Giacchi to assist him in finding the opening price. The price range moved higher for most of the morning, climbing as high as $167 to $170 after starting out at a range between $145 and $155.

For nearly an hour around noon, Mr. Giacchi told brokers he was close to opening the stock but then hesitated as investors adjusted their electronic orders to buy and sell Spotify, leading to changes to its anticipated opening price. On one occasion, brokers on the NYSE floor erupted in shouts, in anticipation that the stock was about to trade, but it proved to be a false start.

Leading up to the listing, Spotify had disclosed price history of trading of its private shares in regulatory filings. Those transactions proved to be a reliable proxy for public investors.

“To have a company use private markets explicitly for pricing guidance for a public listing is a sign of the maturation of the private markets,” said Nico Sand, founder and CEO of Zanbato Inc., which operates a trading platform for institutional investors to buy and sell shares in private companies.

Spotify is largely responsible for reversing a tide of declining revenue in the record industry amid rampant piracy and plummeting CD sales. Last year, revenue rose to its highest level in a decade, with paid subscriptions being the largest contributor to growth.

Now that the company has successfully gone public, it will face the usual business challenges of a technology company—including turning its first profit—while under Wall Street’s scrutiny. It is battling in an increasingly competitive music-streaming arena where nearly all of its main competitors are owned by tech giants who aren’t worried about making their music-streaming services profitable because they are additive to their user ecosystems. With the exception of Pandora Media Inc., Spotify is essentially alone in needing to make its model commercially viable.

Spotify has made it clear it is prioritizing growth over profit and is betting that strategy will make its business more valuable in the long run.