Spotify shares close down at $149 US in unconventional U.S. listing

The highly anticipated shares of music streaming service Spotify closed down at $149 US on its first day of trading on the New York Stock Exchange on Tuesday after opening up at nearly $166. 

The opening price was 26 per cent above the reference price of $132 a share set by the stock exchange on Monday, which valued the service at $29.5 billion. But the stock fell over 10 per cent in the afternoon.

Spotify's public listing is being closely watched by other companies, because the Swedish company structured its offering to allow existing investors to sell directly to the public without listing shares of its own. 

Unlike a conventional Initial Public Offering (IPO), where a company hires an investment bank to underwrite the process by creating the new shares, pricing them and selling them to the public to raise money, the direct offering process bypasses a lot of those requirements, including the need for an underwriter.

The company traded between $48.93 and $132 a share over the past year through private transactions.

'The real price'

Chi-Hua Chien, managing partner at California-based investment firm Goodwater Capital, told Reuters that he thinks the company was trading at a "fair market price."

"It's not manipulated or set by any puts and takes by banks or institutional investors. That's the real price, and I think that will be revealing to a lot of companies." 

Meanwhile, Kim Forrest, portfolio manager at Fort Pitt Capital Group in Pittsburgh, said it was interesting that Spotify's listing wasn't done to raise money for itself.

"It's an interesting way to allow people who already hold the stock to monetize it," he said.

But analysts pointed out the listing saved Spotify tens of millions in fees and gave employees and early investors a chance to cash out.

John Coffee, director of corporate governance at Columbia University told the CBC News that if the company had listed via an IPO, it would have to pay seven per cent of the proceeds to underwriters.

"This direct listing will cost them only 10 to 15 per cent of that amount — that's a major cost saving," he said.

"They've come up with a system for getting liquidity for their employees and shareholders without having to take the more expensive and time consuming route of an IPO."

The listing comes at a time when other U.S. tech giants like Facebook and Amazon have seen their shares plummet amid scrutiny, weighing on the overall tech sector.

Spotify, which was founded a decade ago, is the world's largest music streaming service and has more than 71 million subscribers.

It, along with other notable music streaming services, have changed the way the music industry makes money by giving users access to large libraries of music.

Stock price volatility

Investors, meanwhile, will not know how successful the company's listing has been for another week or two, because of the volatility in the share price, said Coffee.

"Will the price remain relatively stable or jump up and down like a yo-yo? Most companies do fall after their IPO, but the difference is that there is no underwriter to stabilize the price," he said.

"In normal IPOs, the underwriters stabilize the price — they put a floor under the price below which the stock price won't fall, because the underwriters will buy it at that price."

With no similar mechanism in the Spotify listing, it does expose the company's shares to a greater risk of volatility, Coffee added.