Spotify is going public at a terrible time for tech stocks — but this chart should get investors excited

Spotify will go public on Tuesday, but it's launching at a terrible time for tech stocks following the Cambridge Analytica fiasco.
Even Apple, Spotify's biggest competitor in music streaming, isn't immune to the drag.
There's one boring-looking number in Spotify's financial filings that will help make or break its debut.
Spotify's forecast for its gross margin percentage suggests the company has confidence it can reduce the amount of money it pays to record labels.

Spotify is going public at the worst possible time for tech stocks.

Facebook, Amazon, Apple, and other public tech firms have all dragged the wider market down over the past week, amid the Cambridge Analytica scandal, Apple's poor iPhone X performance, and Amazon getting caught in Donald Trump's crosshairs. Facebook alone had around $90 billion (£64 billion) wiped off its market cap.

Spotify's first day on the New York Stock Exchange is already expected to be volatile, given investor questions about how a plucky but unprofitable streaming service can compete with big, rich rivals Amazon and Apple. Come Tuesday, Spotify will now also be exposed to the wider turbulence in tech stocks.

Still, there are reasons to be cheerful. And one reason is this graph:

Spotify's gross margin

Spotify gross margins

It shows Spotify's gross margin percentage. The blue line shows Spotify's revenue in euros, and the red line shows Spotify's cost of revenue. Cost of revenue, in very simple terms, covers how much Spotify has to pay out to rightsholders like record labels.

The biggest takeaway from this graph is that the gap between the two lines is getting bigger. That's good news. The white space shows Spotify has leverage with rightsholders, financial discipline, and a growing number of people willing to pay to stream music. One caveat: The gross margin figure of 25% comes from Spotify's financial outlook for the year and so isn't confirmed yet.

It's important to note how Spotify has done this. In the run-up to its direct listing, Spotify approached the biggest record labels and renegotiated how much money it pays them.

As Business Insider explained in April, it's important for Spotify to demonstrate it has some control over this relationship. An early investor in Spotify has also said the firm has another plan up its sleeve to reduce its reliance on the record labels which provide so much of its music: Offer artists a platform to reach fans directly.

There are still challenges and the big one is: Can Spotify continue to persuade people to pay for music? Come Tuesday, investors can make their own bets.

Join the conversation about this story »

NOW WATCH: Dropbox CEO talks about how he went from rejecting Steve Jobs to an $11 billion IPO