The Difference Between Unicorns And Workhorses
Yesterday Spotify went public in what’s being hailed as a successful direct list IPO. The stock opened at a $132 share price which gave the company an estimated $20B valuation (although no official market cap has been set yet), and it quickly climbed into the $165 range before falling back to $149. On paper this looks fantastic for the streamer because it initially confirms the valuation it’s been selling to pre-IPO investors.
After yesterday’s opening day performance I started to wonder about something. Why does Wall Street have so much confidence in Spotify when it’s the biggest money loser in music streaming, and is in an industry which is so burdened by royalty costs that no company in the sector has ever turned a sustained profit? Then it occurred to me – Spotify is still enjoying its last days as a unicorn. To understand what I’m talking about take a look at this Yahoo Finance article, which was originally published three years ago this month. It explains the Wall Street vernacular for public companies (workhorses), their pre-IPO counterparts (unicorns), and how each is perceived by investors. In short workhorses are held to normal business metrics like hitting revenue targets, earnings per share, etc., while unicorns are selling the dream of future success without a current track record to stand on. It’s even interesting that Spotify and its nearest competitor Pandora are referenced in this article, which still feels about as relevant now as it did three years ago.
Now I know what you’re going to say . . . Spotify has released its financials in the their pre-IPO FI filing and are now a public company, so how could they still be a unicorn? My response is that one day doesn’t make a workhorse. Over the next several quarters Spotify will be judged, as all companies are, on normal business metrics. By then the unicorn façade will give way to whatever horse they’re meant to be. If you need a recent example of this think back to Snapchat, which looked like a mighty unicorn when they went public just last March.