Should investors drop into Dropbox IPO?

Michael Baxter shares some insights about the impending launch of Dropbox to investors.

Article updated: 16 March 2018 10:00am Author: Michael Baxter

Dropbox is coming to the stock market: a valuation of around $7 billion is expected. I have an unfortunate and embarrassing tale to tell which could explain why this could be quite an opportunity.


It’s not often that you can see how a valuation of a tech seems to relate to a company’s profits and revenue. I mean when Facebook or what used to be called Google were listed, valuations could only be justified if you made wild assumptions about growth. As it happens, those wild assumptions would have eventually been proven right, but being wild is not normally considered a good approach for investing.

But for Dropbox, the online storage company, I can see a logical argument. The company is shortly going to IPO at a share price that values it at $7.1 billion. That may seem a lot for a company that has not yet made a profit, despite being around for 11 years, but then recent performance does suggest that profits that could justify such a valuation are eminently possible. There’s a proviso of course, but I’ll come to that in a moment.

Revenue has increased from $604 million in 2015, $845 million in 2016 and $1.1 billion in 2017. During this period, losses fell from $326 million in 2015, $210 million in 2016 and $112 million in 2017. Projections for 2018 vary, but I read a small loss is likely. It does not take much imagination to see how, if the trajectory of the last three years can continue, profits of half a billion could be less than half a decade away, suggesting that a $7 billion valuation is not so excessive - not like most tech IPOs, anyway.


Of course, there is no guarantee that growth will continue, and that takes me to the Dropbox problem - competition. Cloud storage is in danger of becoming a commodity and Apple is in this business with iCloud, then there is Google Docs, and the Microsoft OneDrive - there is more competition too, but those three names clearly show how Dropbox has formidable rivals.
I can see two reasons to be bullish - one relates to a potential suitor, the other relates to what happened to me, in the wee early hours a week or so ago.


I get up early. I usually watch the BBC business news on my iPhone at 5.30, but I have usually been doing some research for half an hour or so before that. Last week, I was watching a video on my phone talking about some whizzy tech at some ungodly hour, when I heard the call of nature. I obeyed the call, earphones in my phone - multitasking you see - who said men can’t multitask? It is just on this occasion my phone leapt out of the ear phones, and, like a guided missile, hit its target, smack in the middle, falling into the toilet.

I can’t tell you what a disaster that was. Apparently, there is a condition called nomophobia, it’s the fear of losing your mobile phone. I experienced something worse in that moment, alas I gather there is no word for dropping your phone in the toilet, although I read it is quite common.

My old phone is dead. Through some miracle of modern technology, I have recovered about half of my data - but I have lost several thousand pictures and various other files.

You see I had both Dropbox and iCloud, but I had too much data.

I am among 500 million users of Dropbox - but just like 98 per cent of those users I did not upgrade to the premium service.
So that’s me learning a lesson. It’s tough, when it comes to paying out monthly subscriptions, where do you draw the line? I pay a monthly fee for Windows and Netflix - but really I should fork out and get subscriptions to half a dozen newspapers and online storage services. But that starts getting expensive.

But the point is that the motivation for storage is fear, and that’s a powerful motivation.

That’s why I think an awful lot more people will start paying for Dropbox. Consider how much profits will increase if the number of paying customers jumps from two to four per cent. If revenue doubled, but costs only increased mildly, which I think is what would happen if the premium ratio doubled, then that IPO valuation looks cheap.


Then there’s Salesforce, the cloud services superpower is buying $100 million of shares in a private placement. It is thought that Salesforce is planning to buy Dropbox entirely in due course.
Steve Jobs, who once tried to buy Dropbox, said that the future of online storage platforms lies in being part of a broader cloud service.

Downround IPO

For the latest investors in Dropbox, the IPO valuation is a blow, the last fund raising round saw the company valued at $10 billion. In fact, the IPO is known as a downround IPO - meaning lower valuation than the previous round.
But I don’t think these investors need to flush their Dropbox shares down the toilet, I think there is a chance that this one, just like my last phone, could fly.

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees.

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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