Stop or more?

July 5th, 2022, marks the first pricing for Deezer on Euronext Paris.

Considering the unfavorable stock market context, Deezer’s investors preferred listing through a
merger with a SPAC, rather than through a classical IPO, whose success was strongly doubtful. Besides
exogenous factors like geopolitical context, macro perspectives, etc., Deezer’s IPO is questionable
most of all given its potential for future development and its economic performance.

On the one hand, Deezer is an industry pioneer (created in 2006, the same year as Spotify); it also
possesses a solid reputation and disposes of a recognized technological know-how, especially in terms
of UI (user interface); Deezer also boasts its successful financing path (€100m raised between 2007
and 2012).

On the other hand, Deezer comes across with a failing governance structure and a subpar strategy.
The latter seems ineffective in following market trends and in differentiating Deezer from competitors.
As a result, financial resources are insufficient and, in turn, penalize the company growth and
development.

In 2022, Deezer totals 9.6m paid subscriptions, split between France and Brasil. In comparison:

- Spotify has 188m paid subscriptions for a total of 400m users;

- Youtube has 80m Music premium subscribers;
- Apple Music reportedly has more than 100m subscribers for a more than 700m subscribers of
all Apple’s services.

In addition, one can also add the users of Amazon Prime, which now includes an illimited access to
more than 100m recordings.

The market is attractive indeed: its growth is estimated to be of about 20% per year. The pioneers have
clearly demonstrated that (1) paid subscription model is acceptable by users (same as for video
services), and that (2) they have a real capacity to innovate both in terms of content and services,
thereby fueling the growth.

However, in contrast to other cultural products, the economic performance (profits and returns) is still
not there despite the strong revenue growth, and low costs of copyrights. In this regard, Deezer is
behind:

- It lacks growth in its business activities

- Its margins are way below the industry leader
- Its financing capacity is limited in comparison to its main competitors

Deezer vs. Spotify – a selection of indicators

5-year average 5 2022 (estimated)

Deezer Spotify Deezer Spotify
Revenue growth +44% +25% +13% +20%
Gross margin 12,6% 25% n.a. 25%
Sales & marketing expenses (% CA) 23% 12.5% n.a. 15%
Operating margin −27% −2% −22% −6%
Net financial debt n.a. n.a. −€20m −$1,931m
The stock price since the merger with the SPAC is hence not surprising:

Deezer – pricing since the first trading day Deezer – relative to Spotify (red) and Euro Stoxx
Media (green)

The main question is whether Deezer an investment opportunity, despite its negative performance?

- To determine this, you must perform a detailed valuation of Deezer, based on consensus data
(stock market analysts estimates). Importantly, you should not hesitate to challenge the
consensus should you find it necessary!
- You must also put your valuation into perspective, considering the industry context and the
positioning of Deezer within its sector.
- You must provide a conclusion on whether Deezer constitutes an interesting investment
opportunity (Buy) or not (Sell).