Spotify in the Spotlight – Company Gets Ready to go Public

Spotify, founded in 2006, has just filed for their company to go public. Different from most initial public offerings, the Spotify stock will go straight to the NYSE with no team researching what the initial price offering should be. The risk associated with the stock could be very high since it could take wallstreet time to understand what the company should be trading at. As quoted from the filing, “prior to the opening trade, there will not be a price at which underwriters initially sold ordinary shares to the public as there would be in an underwritten initial public offering. This lack of an initial public offering price could impact the range of buy and sell orders collected by the NYSE from various broker-dealers. Consequently, the public price of our ordinary shares may be more volatile than in an underwritten initial public offering and could, upon listing on the NYSE, decline significantly and rapidly.”

How does Spotify stack up against Competition?

Spotify is up against tough competitors offering similar music services: Pandora, Rhapsody,Soundcloud, and not to mention the new and emerging Apple Music. Impressively, Spotify leads the industry in monthly subscribers with 71 million, the next closest is Apple Music with 36 million.  Although Spotify is much farther ahead, it is important to mention that Spotify was founded in 2006, while Apple Music was founded in mid 2015. Spotify has had a 9 year head start and Apple already has half the amount of subscribers they do.not only does Apple offer a quality service, but they also have the branding and marketing to heavily promote there service At this point in time, Apple’s success and growing popularity is one of the companies biggest threats.

How much money does Spotify make?

According to their F1 they have recorded increasing revenues for the past three years. In 2015 revenue was 2.37 billion, in 2016 3.6 billion, and in 2017 4.99 billion. However, the company has lost money the past three years as well. In 2015 the company recorded a operating loss of 290 million, in 2016 a operating loss of 431 million, and in 2017 a operating loss of 465 million.(All numbers recorded are in USD)

Our View: While Spotify is one of the leaders in the industry, we dont believe that there is anything separating them from the competition. From what we can see, the service that they provide doesn’t blow away the competitors. This is a problem for Spotify because it leaves little room to raise prices because there are endless alternatives for the consumer to go to for a cheaper price. This would opens the door for other music streaming services such as Pandora and Apple music to take some of their market share.

Additionally, with the large user base that Spotify currently has, they are still losing large amounts of money. Although Spotify is the most popular streaming service, in order for them to become profitable they will need to decrease expenses by renegotiating the amount of money they pay to creators or increase the cost of their premium membership. However, Increasing the cost of the membership is a slippery slope as it could turn customers away. Additionally, Spotify has very little leverage negotiating with music creators as they rely on their new content- if the company doesn’t have the latest popular song, the consumer will not hesitate to take themselves to a different platform.

Will Spotify be able to cut down their expenses while maintaining their market share to turn a profit?

Let us know your thoughts in the comments below!

The Future of Chipotle – Can Their Stock Make a Turnaround

Emerging in 1993, Chipotle was one of the first restaurants to serve healthy fast food. Being one of the first in the category of healthy fast food, Chipotle’s customer base grew rapidly, attracting many who had previously been deterred from fast food due to its lack of nutritional value. Opening new locations and growth of sales allowed Chipotle to reach a market cap of 23.41 Billion in late 2015.

For countless years, Chipotle seemed unstoppable in the fast food realm. After years of tremendous growth, Chipotle hit a massive roadblock in 2015 as illnesses such as E. coli and salmonella were reported by some of Chipotle’s customers. With hundreds victim to Chipotle’s sanitary issues, it’s stock took a turn for the worst. Reports regarding Chipotle’s sanitation continued, forcing Chipotle to temporarily close some stores. As their operating income plummeted from 764 million in 2015 to 35 million in 2016. When it finally solved its sanitary issues, the company was not the same. The huge customer base that it had built up was greatly diminished. The sanitary scandals put a bad taste in many of Chipotle’s customer’s mouths. Also, acknowledging the initial success of Chipotle, many other healthy fast food chains began to appear. These competitors capitalized on Chipotle’s sanitary issues by capturing some of their market shares.

Ever since their sanitary issues, Chipotle has struggled to return to its previous brand image and has seen decreases in same-store sales. This has caused the stock to sink from a high of $758 per share in in early August of 2015 to a low of $247 per share on February 9, 2018. Currently Chipotle has a market cap of 9 billion dollars with a P/E of 52. Looking at the P/E,  it is clear that investors still believe that Chipotle will eventually return to its former self and start earning profits like it was. It is on the right track, as it’s revenue went from 3.9 billion in 2016 to 4.47 billion in 2017. Also, Chipotle recently hired a new CEO, Brian Niccol, former Taco Bell CEO. His great track record in the fast food realm has brought new life to the Chipotle stock. Since they released the news on its leadership, its stock has risen from $251.33 to $322.70 per share.

Although news of Chipotle’s new CEO has temporarily boosted its stock, Chipotle is going to need strong earnings reports in the upcoming quarters to justify the continuation of this trend. In order to achieve these sales, Chipotle will need to regain lost customers.  Is it possible for Chipotle to regain these lost customers?  The amount of time it will take for previous Chipotle customers to regain trust in the brand is unknown. Some may never eat there again and some have already returned. Chipotle in our eyes has done everything they need to do to gain customer confidence and make the overall brand trusted again. Because Chipotle has laid the groundwork with 2,400 locations and not a single dollar of debt; they need to and have been putting millions of dollars into food safety. It has invested in its food suppliers to help it grow safer foods along with investing in its restaurants by educating employees.

At the high of Chipotle’s stock, they were one of the only restaurants in the healthy fast food business. Now, in order to reach their previous sales and profitability, Chipotle will have to compete with the numerous other restaurants that have emerged in the same category. This being said, there may also be more demand for healthy fast food than ever before.

Our Point of View:

Chipotle was wildly popular when it first came out, with lines out the door in certain locations. When the news regarding the sanitary issues came out, we saw many people turn away from Chipotle. Despite the decrease in sales, we haven’t seen a decline in the food quality. We always thought that at some point these customers would slowly return as the news blew over. On a smaller scale, from looking at our friends and family we have seen them beginning to venture back into being a Chipotle consumer. Recently, Chipotle released a 0.9% increase in same-store sales, which could just be the beginning.  Maintaining the high-quality food, opening new stores, and spending millions on food safety, is why we believe that Chipotle may be able to both regain and accumulate new customers, returning themselves to their prior sales and brand image.

Disclaimer: Do not invest your own money without doing your own research, our content is not meant to convince you to buy or sell a stock, but simply to share ideas and unique viewpoints.