Why the iHeartMedia Listing Is Not Like Spotify

Wall Street is tuned in to direct listings.

But make no mistake—the upcoming iHeartMedia listing isn’t the new Spotify.

The radio company filed with Nasdaq to convert its OTC (over-the-counter) shares to a listing (similar to a direct listing) under the ticker “IHRT”—set to debut July 18. iHeart would go public without issuing new shares, and would make the shares already available for trading to investors officially on the public market. But while iHeart has some $448 million on hand going into their listing, there is obvious cause for concern over the company.

Just last year, the radio giant filed for Chapter 11 bankruptcy in order to restructure over $20 billion of debt ($5 billion of which they still hold). And having struggled to post a profit for years amid pressure from streaming services like Spotify and even SiriusXM, iHeart has been looking to change its tune.

While recent listings like Slack Technologies have seemingly been successful, iHeartMedia, the largest radio provider in the U.S. with over 850 stations, has myriad challenges.

“I think the question to be asking there is really the same question we ask of say, a Netflix versus traditional media itself: How exactly does the incumbent player, the one who is at a more mature stage, has traditionally operated through linear delivery channels, or in this case terrestrial radio, how does that pivot in an increasingly digital world?” says Raymond James’ Justin Patterson.

As a behemoth of the mature radio industry, iHeart’s choice to go with a listing draws obvious comparisons with streaming service Spotify—who went public with the similar direct listing in 2018.

iHeart is no disruptor

But Kathleen Smith, principal at Renaissance Capital, a provider of institutional research and IPO ETFs, says the iHeart listing is very different from other recent direct listings. The company withdrew a filing for a traditional IPO, and Smith believes the decision to go public with a listing (not an IPO) may be more of a backup plan for iHeart due to an inability to drum up investor interest.

And, as Evercore ISI’s Kevin Rippey points out, Spotify and Slack are both high-profile startups disrupting existing business models, unlike old guard iHeart.

“You have obviously a lot of investor excitement over [Spotify and Slack] given the growth profile and … potential disruption,” Rippey told Fortune. “iHeart and the broader portfolio of terrestrial radio stations that it controls are a very well understood business and have been around for a long time.” In fact, Rippey says that if the iHeart case highlights anything, it’s the “flexibility of direct listings as opposed to the traditional IPO process.”

iHeart’s lean cash on hand (compared to other listings like Slack, which had $841 million in cash) is another point of note.

“It’s unique in that this company needs capital, so it’s a bit more of a backdoor listing because they’re already doing some trading [in the pink sheets],” Smith told Fortune, referring to stocks that trade over-the-counter (that is, not on a public exchange).

According to iHeart’s now-withdrawn S-1 filing, the company has relatively flat revenue from the previous year (around 2.5%), with media division revenue accounting for $3.6 billion on $6.3 billion in 2018—compared to Spotify’s near 30% revenue growth. And EBIDTA growth is also slowing, around 27% last year versus 28% in 2017.

This growth is going to divide the listing’s potential investor base, Patterson suggests. He says that Spotify investors are likely looking for “growthy” assets, and that iHeart’s lack thereof will likely “bifurcate between growth and value.”

Advertising revenue

One potential plus for the radio giant is its formidable advertising stream. iHeart draws the majority of its revenue from tapping into the $15.90 billion U.S. radio advertising revenue space. Spotify, on the other hand, only has about 10% of its revenue coming from this stream, Patterson says.

“iHeart [has] tremendous advertising revenue stream, and has a lot of its own content,” Patterson said. “iHeart talks a lot about being one of the largest creators of podcasts. That’s an area that investors are pretty excited about for Spotify, [so] that might be an opportunity for iHeart.” Podcasts may very well be a strong move for both companies (Spotify shelled out $340 million to acquire podcast networks Gimlet and Anchor this year), but analysts suggest iHeart has an edge.

Rippey believes investors may be keen on iHeart given the company’s ability to provide certain content other streaming services can’t—namely, live local sports and news. And Patterson believes that while digital companies like Spotify and Apple Music have ample listeners, they’ve “struggled to penetrate the car”—something that might give iHeart the upper hand in some areas.

However, according to Renaissance Capital’s Smith, “investors in general look at advertising revenue as a bit more risky” compared to the subscription model Spotify employs.

At the end of the day, says Rippey, an old media giant like iHeart is “likely a melting ice cube. But, it [should be a] highly-profitable ice cube as well.”