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Home / Business / Companies

Stock Takes: How to spotify a winner

Tamsyn Parker
By Tamsyn Parker
Business Editor·NZ Herald·
5 Apr, 2018 05:00 PM5 mins to read

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Despite its success in gaining massive numbers of subscribers Spotify has yet to turn a profit. Picture / AP

Despite its success in gaining massive numbers of subscribers Spotify has yet to turn a profit. Picture / AP

Spotify's $37 billion listing on the New York Stock Exchange this week seems to have hit an early high note with investors.

The streaming service which direct listed without raising any new capital saw its share price surge on its first day of trading rising from US$132.50 to US$169 before closing on US$149.01.

But is it a good buy for New Zealand investors?

Mark Lister, head of private wealth research at Craigs Investment Partners, says Spotify has followed in the footsteps of a number of technology giants including the likes of Twitter, Snap and Netflix.

"All of those companies are really interesting, exciting businesses with huge growth prospects," he says.

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But the other side of the coin is that they also come at a high price — making them a more risky investment for those who want to dive in.

Despite its success in gaining massive numbers of subscribers Spotify has yet to turn a profit.

Lister said it was also hard to know if Spotify's strong growth would continue or whether the "next big thing" would come out of left-field and take its place.

Netflix and Amazon have been some of the strongest performing tech stocks in recent years.

"But for every Netflix or Amazon there has been one that hasn't hit the spot," says Lister who points out that even Twitter has seen a pretty mixed ride since listing.

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Lister said Spotify was not dissimilar to New Zealand's tech success story Xero which listed at a low price and then rose to nearly $45 before falling back and rising again with the share price strongly influenced by future expectations.

"People have a tendency to get ahead of themselves." Lister said while Spotify was a really exciting, great business the risks meant people needed an even bigger element of "buyer beware".

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Spotify shares closed at US$144.22 yesterday.

Darling to disaster?

Shares in Orion Health Group hit an all time low this week after the company revealed it had missed already downgraded revenue guidance.

The shares hit 59c apiece on Wednesday — a far cry from its November 2014 initial public offer issue price of $5.70.

The company says it plans to cut a further $25 million to $30m in costs out of the business through an ongoing restructure.

But its plight has raised questions from an analyst who believes the company needs to raise capital to keep going.

Stephen Ridgewell, a senior research analyst at Craigs Investment Partners, said when Orion came to market it had a very good track record having built a successful business in the US health industry from New Zealand.

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But in the last two years the company had tried, unsuccessfully in Ridgewell's view, to build up its Population Health and Hospitals business but had not gained enough customers.

"They haven't had any major contracts announced in two years now."

At the same time Ridgewell said he believed the company had spent well over $100m in research and development.

While the cost-cutting moves were a step in the right direction, he said the company was not likely to get to break even point on cost-cutting alone. And he warned that cutting back on capability within the business could make it harder to win more contracts.

"I'm worried about the potential for a negative feedback loop. If you cut staff and that results in other good people leaving it can be hard to keep existing customers happy."

Ridgewell estimates the company's cash position may be down as low as $2m and that the company needs an equity injection of around $30m.

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"The question is who provides that?"

Could there still be a white knight out there looking to invest in Orion or will investors have to put their hands in their own pockets again?

Investors will be hoping to hear more detail before the company's result at the end of May.

Shares in Orion closed up 1c at 60c yesterday.

Under pressure

Two major New Zealand banks have revealed how much they bankroll the fossil fuel sector in the last week.

ANZ was forced to defend itself after Forest & Bird decided to switch its business from the Aussie-owned bank to Kiwibank over concerns about ANZ's fossil fuel investments.

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The bank told media fossil fuels were a very small part of its total portfolio at 0.24 per cent or $414m as of December, mostly in the gas sector, and said it had decreased over time.

Westpac bank revealed its fossil fuel investment as part of a report on the impact of climate change. The bank has reduced its investment in companies involved in fossil fuel extraction and production by 55 per cent since 2012 but still has $318m invested.

With the new Labour-led government's stance on climate change made clear, it will be interesting to see if this puts more pressure on the major lenders to move faster.

ASB was not available for comment yesterday and BNZ was not able to break out figures for its local operation.

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