Worries set in as Spotify valuations continue to escalate wildly

The escalating value estimates of Spotify have investors and venture capitalists became highly excited - and some admit they’re getting nervous about the hype.

Last week the excitement was that Spotify was worth US$16 billion, up from US$13 billion three months ago.

This estimate was from Reuters, based on information from a number of sources.

Due to rising demand for shares and rising streaming numbers (up 60.4% in 2016, and of which Spotify has 140 million users and subscribers), would be up to US$20 billion by the time it went for an IPO later this year or early 2018.

Ultimately, said technology investment and advisory firm GP Bullhound, Spotify would be worth $50 billion. GP Bullhound has shares in Spotify.

The Swedish firm’s revenue rose 50% last year to revenues of $3.4 billion, which is seen by some that it’s on the right path to make money.

But the issue that worries some is, where will Spotify’s profitability come from? Would the Swedish streaming service buckle under the fact that its business model is not sustainable.

For all their hype, IPOs by Twitter and Snapchat proved disappointing to investors.

Daniel Sanchez, writing in Digital Music News, pointed out the negatives: “Top executives jumping ship. Years in operation without a profit. Multiple financial reports showing ever-mounting losses.  Lavish offices that cost more than what the company earns.”

More specifically: net losses doubled in 2016 to $600 million.

It has spend over $566 million on a 17-year lease on its World Trade Center offices. The contract works out to $33.29 million a year on base rent alone, or $2.77 million a month.

Sanchez looked at the similarities with SoundCloud which almost went belly-up a few months ago until bailed out by exasperated investors, and forced to close offices in a number of countries and sacking 173 employees.

Speaking with Business Insider, Louis Citroen, an analyst at Arete Research, shared that worry.

“It’s hard to speculate on Spotify’s valuation since we only have historic results prior to the most recent renegotiation with the music majors.

“But a $20 billion valuation sounds punchy as it implies both that Spotify can continue growing customers at a fast pace, and that it might achieve a double-digit margin.  

“We can believe in the customer growth, but are less sure about profitability given high royalty costs and limited differentiation with rivals on content, price or technology.”