In December 2013, I profiled Spotify as one of the two hottest IPOs for 2014.
And that was before I had any official knowledge of a launch, mind you.
Well, call me clairvoyant… because last week, Reuters all but confirmed the company’s decision to go public.
As it turns out, the scoop came from a job posting on Spotify’s website and LinkedIn (LNKD) page.
One that included no fewer than six references to “SEC filings.”
It begged the question: Why is Spotify looking to hire someone with that very particular skillset?
Once rumors started spreading, Spotify tore down the job post and all references to the SEC – an attempt to squash speculation and avoid any allegations that it’s trying to “game the system” by promoting the IPO prior to any official filing.
Too late, boys. The word is out.
Question is: What are you going to do about it?
Spotify is going to be a hot IPO. But only in the same way that Facebook (FB) was a “hot IPO.”
In the same way that Twitter (TWTR) was a “hot IPO.”
And in the same way that Pandora (P) was a “hot IPO.”
And the hotter it is, the more money we stand to make.
But not in the way that you might think.
Keep in mind, the reason why Spotify is destined to be a hit is due to its years of popularity among consumers and heavy media coverage. The media and analysts are chomping at the bit for any rumor that will give them something new and exciting to talk about.
But before these guys clog up the airwaves and start clouding your judgment, let me tell you what you need to know…
Don’t Believe the Hype… Just Profit From It
As we’ve already seen with several other tech IPOs, when the filing becomes official, hype often triumphs over reason.
That hype swells a company’s valuation to inflated levels.
But once the stock hits the market, it often gets a reality check.
Just like Facebook…
Just like Twitter…
And just like Pandora…
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And the reality for Spotify is pretty grim.
While the number of new subscribers and revenue growth has been impressive, the company is consistently unable to rein in its cost of sales margin and operational costs.
More specifically, it’s hemorrhaging money, due to the crippling 70% it shells out in royalties.
So while Spotify offers paid subscriptions as an upgrade to its freemium service, the hard truth is, the more members the company adds, the more money it loses.
This is a clear indication that the royalty structure is restricting Spotify’s ability to generate sustainable margins using its freemium model.
Contrast that with its main rival, Pandora, where roughly 90% of its revenue comes from advertising.
Spotify’s results speak for themselves…
So from a direct investment standpoint, it’s clear: Don’t go near Spotify.
However, that doesn’t mean we can’t make money from the lemmings who’ll buy into its IPO hype.
Plus, we can make it before Spotify even files…
How to Play Spotify’s IPO
Instead of investing directly in Spotify, make a play on its pre-IPO dog-and-pony show.
Back in December, I highlighted Global Silicon Valley Capital (GSVC) – a venture capital firm that gives investors the opportunity to participate in the growth of future IPOs, today in one publicly traded security.
At the time, GSVC shares were trading at $10.34. Today, they’re up to $12.60 – a healthy 22% gain. So what’s next?
Remember, the goal is to smash a quick home run with the stock. Just like GSVC investors did when they played Facebook’s and Twitter’s pre-IPOs.
When Facebook announced it was going public, GSVC surged from $13.49 to $20.45, then tanked when FB actually went live.
When Twitter announced it was going public, GSVC shares shot up 115% – from $7.67 to $16.48 – only to drop right after Twitter went live.
GSVC owns a 10% stake in Spotify, and I expect shares to perform in a similar way when Spotify formally announces its IPO and looks for deep-pocketed investors.
The key is to close any position before Spotify’s IPO hits the market, or roll the profits into a downside position before the shares adjust.
Your eyes in the Pipeline,