Last week the IPO of SFX Entertainment (SFXE) debuted on the Nasdaq marking the first public company built on EDM, a milestone many in hip hop craved but none achieved at this level. Priced at $13, the stock closed at 11.89 on Wednesday, its first day of trading. Though skeptics abound, this morning the stock has been trading between 11.51 and 11.93 on relatively low volume. It seems quite possible that SFXE was priced correctly to maximize gain for the company and earlier investors and is now moving forward in relatively stable fashion. At this stage in a stock's life I'd say that's a win.
Disclaimer: I'm not an analyst. I don't recommend you buy or sell specific stocks. I own and have no immediate plans to own SFXE or anything the least bit related.
SFX Entertainment launched its Initial Public Offering as SFXE last Wednesday and raised $260 million. In trading to date, SFXE has ranged from 10.64 to 13.39. It seems relatively calm at the moment with fluctuations at low volume.
Why Didn't SFXE Blow Through the Roof?
SFX Entertainment is not profitable and its losses are increasing:
"On a pro forma basis including SFX's planned acquisitions, the company would post revenue of $92.3 million and negative $15 million in adjusted EBITDA, and a net loss of $71.3 million for the first six months of 2013. That contrasts with SFX's 2012 revenue of $238.6 million, adjusted EBITDA of $14.6 million, and net loss of $67.4 million. "
$150 million of the $260 raised is expected to go to acquisitions including many already in the works. The company is also "planning a major increase in its debt."
This EDM thing, who knows how long it could last?
In addition, as many are noting, the prospectus points to some serious risks with any company in the live EDM industry involving drugs and alcohol with a focus on liability and legal restrictions.
As TheStreet's Antoine Gara points out in a solid overview of SFXE, the company admits to "material weaknesses in our internal controls over financial reporting that, if not properly remediated, could result in material misstatements in our financial statements in future periods" including what Gara characterizes as an "unusually large amount of audit adjustments"
It makes sense the stock didn't blow up. I think it's a good sign that it hasn't dropped further and seems to be finding an initial trading range on which to build a base.
The Best Part is the Prospectus
I found the prospectus to be surprisingly good reading though I admit to not having read it all. Seeing SFX Entertainment's business laid out in relative detail gave me a stronger grasp on what they're doing as well as a way to consider what's happening with EDM as both a musical phenomenon and as a business.
I don't have any particularly profound thoughts but it's clear that SFXE will have to grow, since it's now a public company, and that growth currently would have to come from expanding existing markets, entering new markets and growing web properties such as Beatport
But that growth is also dependent on the growth of EDM. Having covered a similar growth phase of hip hop in the previous decade, I'm finding a lot of similarities and differences. Given that hip hop didn't peak until it had fully saturated every nook and cranny possible and fully jumped the shark, I think we're still in the initial phases of development with lots ahead including corporate buy-in in the form of brand sponsorships, tv shows, tech startups, new festivals, more blogs, websites and mobile apps, crossovers with other genres, books, movies, collosal business failures, major Molly hysteria. And so forth.
Just because EDM may still have lots of room for growth doesn't mean that SFX Entertainment will grow with it. Acquisitions will now become more expensive at every level of the game. Some people will expect too much and sometimes get it. Acquisitions and partnerships with less tested entities will be required now that much of the top layer has been picked over. New deadly drugs might come on the scene causing serious legal, liability and branding issues. And so forth.
Should be a great show!
- SFX Buys Stereosonic Festival For $75 Million
- After Big IPO, EDM Powerhouse SFX Ent. Stock Stumbles On First Day Of Trading
- SFX/Live Nation Founder Bob Sillerman Betting $1 Billion On Electronic Dance Music
Hypebot Senior Contributor Clyde Smith (@fluxresearch/@crowdfundingm) also blogs at Flux Research and Crowdfunding For Musicians. To suggest topics for Hypebot, contact: clyde(at)fluxresearch(dot)com.