The long-awaited day finally arrived and Spotify (SPOT) has become a publicly traded company. When added to the recent IPO of Dropbox (DBX) , this bodes very well for GSV Capita (GSVC) , a position in the Stocks Under $10 portfolio. The key for GSV shares, in our view, is the appreciation in its investment portfolio positions, two of which are Spotify and Dropbox, which drives its net asset value per share higher. As of year-end 2017, Spotify accounted for 15% of GSV's investment portfolio, while Dropbox was 8.7%.
On March 22, Dropbox priced its IPO at $22 per share, and out of the gate the offering was met with a strong reception as the shares closed at $29 and have traded between $29.90 and $31.59 ever since. This is not all that surprising given the transaction was reportedly 25 times over subscribed. For those who may have forgotten, the original price talk on the Dropbox offering was far lower, in the upper teens.
Viewed from the perspective of GSV, the Dropbox offering was a success. Moreover, with consumers, corporations as well as other entities embracing the cloud, we see a bright future ahead for Dropbox, especially as it continues to take a page out of Alphabet/Google's (GOOGL) playbook and pile on the features. In the coming days, we should get a swath of analyst coverage and odds are, favorable ratings as well as price targets, especially from the underwriters, Goldman Sachs, J.P. Morgan and 10 others.
The news Tuesday, however, was the Spotify IPO, with the stock opening at $165.90. Unlike the Dropbox offering, which was a traditional going public transaction, Spotify opted for a direct listing, which means there were no underwriters and subsequently no price talk ahead of the opening trade. That said, in the private markets, Spotify shares were said to have been trading near $132-$133. And lest one think Spotify went solo on this endeavor, it was advised by Goldman Sachs, Morgan Stanley and Allen & Company. That likely means follow-up research and favorable price targets.
Even if those three advisors don't follow through on that, which is unlikely, in our view, we've already seen price targets emerge in the $200-$220 range from RBC Capital and MKM Partners, with Guggenheim establishing a $175 target. Helping set the base for those targets, last week Spotify shared guidance for first-quarter 2018 revenue to climb 22% year over year and for full-year 2018 revenue growth of 20%-30%. That sound you just heard was the air being let out of the Pandora Media's (P) balloon as there is now a far better play on streaming music services. Pandora is only expected to grow its revenue some 3% this year.
The one wrinkle in the Spotify forecast is the company expects to post bottom-line losses, and while investors will likely want to own shares in the largest global streaming music service -- the Netflix (NFLX) of streaming music, so to speak -- over time we're likely to see questions crop up over when it will be profitable and deliver earnings per share. But that's at least several quarters away, and the near-term focus over the next six to 12 months will be the company delivering subscriber growth. Again, similar to Netflix in its early streaming days.
When it comes to both Dropbox and Spotify, their market positions in their respective businesses are enviable -- so enviable, in fact, one has to wonder why Apple (AAPL) didn't buy them several years ago. If Apple did, iCloud and Apple Music would likley be very different animals today.
In his recent shareholder letter, Warren Buffett reminded investors to buy good businesses. Looking at both Dropbox and Spotify, both are benefiting from the ongoing shift toward cloud and digital/streaming services. Both allow people access to content when they want it, where they want it and on the device of their choice.
The nice thing for Stocks Under $10 subscribers is we don't have to choose one or the other as our GSV Capital owns both.
This commentary is excerpted from an Alert sent to subscribers of Stocks Under $10 on April 3. Click here to learn more about this portfolio, trading ideas and market commentary product.
-- Chris Versace and Stephen "Sarge" Guilfoyle are co-portfolio managers of Stocks Under $10.
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