About five years ago I stopped buying CDs and purchased a subscription for steaming music site Rdio. In an instant, my music listening habits changed. I now had millions of songs at my fingertips, just like in the Napster days, but now legal, and every new release came straight to the app. I eventually switched to Spotify after Rdio died in 2015 and I haven't looked back. I love Spotify's personalized playlists, which have helped me discover more music, and its interface is simple to use.
When Spotify recently announced it was going public, through a direct listing some time in late March or April, my first thought was that maybe I should buy some stock. I know many wealthy people who have done well off tech stocks, but I've never wanted to take the risk on these often-volatile companies. But then I think about legendary investor Peter Lynch's famous advice of "buy what you know." I get how Spotify works: Pay a monthly fee and then listen to music. It feels like less of a risk to buy shares in the company, and maybe it's a good way to give my portfolio a boost.
I had the same thought when file storage service Dropbox announced its initial public offering in February. I started using it in 2012, and it's since changed how I work, store photos and collaborate with colleagues. I'm happy to pay the US$200 a year for two terabytes of storage.
Buy what you know
When Mr. Lynch offered his advice, he was talking more about staples-like stocks, such as banks and utilities. But do those words of wisdom apply in today's world, in which some technology offerings can feel more like consumer staples companies than high-flying stocks?
Buying a business because of your avid use of its products is still a good investment philosophy, even when it comes to technology stocks, says Paul Harris, a partner and portfolio manager with Toronto's Avenue Investment Management. "I would agree with that methodology of looking at stuff," he says. "You should buy what you know," he says, adding that if I invested in Apple in 2007, after my beloved iPhone came out, I'd be up 750 per cent right now.
Unfortunately, love only goes so far when it comes to stock picking – and liking a company too much can distract you from a business's many blemishes. I may be content with forking over US$180 a year for a Spotify family plan, but even though it's the top streaming music service with 71 million subscribers, it's going to need even more people like me to make up for the US$1.5-billion loss it recorded in 2017.
There aren't nearly as many Dropbox fans out there – it said in its IPO prospectus that it only has 11 million paying subscribers – and while it brought in revenue of US$1.1-billion last year – double that of 2015 – it lost US$111-million. The company also warned people that it "may not be able to achieve or maintain profitability."
Even if I thought that millions more people would sign up to Dropbox or Spotify over the next several years, how loyal am I really to these brands?
Streaming music services are notoriously stingy when it comes to paying artists, often forking over less than a penny per play. What if musicians continue demanding increases, and Spotify must raise their prices? Apple, with its bloated bank account – it's expected to bring US$250-billion offshore money back into the U.S. – could easily decide to mess with Spotify and slash the cost of its own streaming music service. Google Music is already free.
It's the same with Dropbox: Apple, Google and Microsoft offer online storage and there are many other smaller competitors vying for market share, too. And that is one of the biggest reasons to stay away, says Bob Sewell, president and CEO of Oakville's Bellwether Investment Management. "What if Apple cuts its prices to $5 a month?" he says. "Do you switch?" I can't say that I wouldn't.
Buying an IPO is a risk as it is. Tech valuations are often high and this time is no exception. Reports have put Spotify's valuation at US$23-billion and Dropbox's at US$10-billion, which may be a lot for companies with no earnings.
As well, its competitors haven't done well post-IPO. Box, another file-storage site, is down 16 per cent since it went public in January, 2015 – its stock price dropped nearly 20 per cent on March 1 after it lowered its revenue guidance – while music streaming site Pandora, which bought Rdio in 2015, is down 64 per cent since it went public in 2011.
So, what's a fan of these companies to do? Mr. Sewell told me that if I really do believe in these businesses, then I should at least wait a few months, or longer, to see whether they can deliver on their promises of growth. Most companies see wild stock market swings post-launch, as insiders try to sell stock, so buying on the day of the IPO is often a bad idea.
Avenue Investment's Mr. Harris also suggested waiting to see what price the stock might level out at, and then look at fundamentals like earnings and growth potential, to see whether there are reasons to buy the stock other than just being an avid user of the company's product.
Both say that identifying potential opportunities based on my willingness to pay for their services is a good place to start, but it can't be the only reason to buy in. "That's a good way to think about buying stocks," says Mr. Harris. "But where it falls apart is when you get too attached. You still need the numbers to come on side."