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Spotify IPO: A better way to trade the potential IPO

Online music streaming service Spotify may be prepping itself for a 2015 IPO in a deal that could value it at $8 billion, according to Reuters. But with fierce competition, royalty and other operating costs cutting into profits, an $8 billion valuation may be pushing it.

According to Digital Music News, Spotify “is not disclosing any subscriber information at this time.” That could mean anything. But what we do isn’t sitting well. In March 2013, the company announced it had reached six million paying users. As of February 2014, though, the company would only say it has, “over six million.”

That could mean anything.

But if analysts want this to IPO anywhere near $8 billion, the company has to show signs of profitability and further growth with real numbers. I don’t think Spotify has the stability that Pandora has. I don’t think it can withstand the financial pressures that Pandora battles. And CEO Daniel Ek can’t just say, “I think we’ll probably announce numbers every now and then, when it makes sense” when asked about user numbers.

That’s not an $8 billion answer.

With 73.4 million users and a $7 billion market cap, competitor Pandora just posted its most profitable quarter on record. But its already worrying investors with Q1 revenue guidance of between $170 and $176 million, coming in below $176 million estimates. Q1 EPS guidance of a 14 to 16-cent loss is much worse than the 12-cent loss expected, too. Slower listener growth and its war to pay artists and labels less money doesn’t make things easier.

It may be another “hotly anticipated” potential IPO, but I’ll tell you what I told Twitter enthusiasts in September 2013. You have a better chance of turning a profit with the First Trust IPOX Fund (FPX). In September 2013, it traded at just $25. It now trades at $46.