Spotify and the Wisdom of the Masses

The cooperative valuation mechanism of a stock exchange is presumably apparent to everyone; if enough people think a stock is undervalued, there will be an increase in demand that will drive the stock price up. Likewise, a decrease in demand means that the traders think the stock is overvalued. At the end of the day, valuations of even the largest corporations will be determined by the self-interested actors trading stocks.

The whole process seems to rely on the “wisdom of the masses”. That said, the initial process of a company going public depends completely on expert intervention; the company cuts a deal with an investment bank that will buy up all the shares available for trade and sell it to the public at a price they set. This price is the product of the investor bank’s evaluation of the company’s cash flow, assets, sales, the value of competitors already traded publicly etc. Thus, experts determine the price around which the company’s stock starts being traded. The investment bank also launches a “road show” in which the bank introduces the company to investors and collects orders from them. At the end of this process the shares are sold and the company becomes publicly traded. Overall the process is referred to as an IPO, Initial Public Offering.

Spotify recently decided to go public and do none of these things. Reports note that this is the first time a company this big is going public without an IPO. They will instead do a DPO, Direct Public Offering. There will not be an investment bank gathering investors and setting the initial price. Instead, the initial price will be whatever the traders make it out to be. It will be interesting to watch how the price of the stock fluctuates in the first days.