DropBox Inc. (NASDAQ:DBX) pulled off the biggest tech IPO of the year, with the shares up 43% to $30 in early trading. The company raised $756 million, of which $193 million went to various insiders. In all, the market value of the Dropbox IPO is about $13 billion.
The roots of the company go back to 2007, when MIT student Drew Houston was frustrated with his USB flash drive. It was cumbersome — and yes, he frequently lost his devices!
So he coded his own solution by leveraging the cloud. This meant that data was centralized and could be synced across the web and mobile devices.
Yet Houston quickly realized that his service could have wide applications and seemed like a great business opportunity. It was not long until Dropbox became a red-hot startup.
According to Houston: “Seemingly overnight, millions of people around the world were using Dropbox to sync their photos and documents. Many of them would write in saying how much they loved the product, and their stories were fascinating. We heard from scientists researching Alzheimer’s, filmmakers at Sundance, and disaster relief workers rescuing earthquake victims. We even got fan mail from an inventive group of farmers who were using Dropbox to coordinate tractors via satellite (we never really figured out how that worked).”
But Houston was not just about creating cool technology. He also was smart to use the freemium model. That is, the Dropbox was available for free — until certain limits were reached. The result was that this helped to greatly spread the service. Oh, and there was another advantage: Dropbox proved to be viral. This was because users would often share their files with friends and colleagues.
Yes, for the most part, Houston made the right moves. Today Dropbox is a massive business, with 500 million registered users and 11 million paying members. Since inception, more than 400 billion pieces of content have been saved to the platform.
It’s true that Dropbox continues to post net losses (in terms of GAAP accounting). But the company has been able to nonetheless generate substantial free cash flows. Last year, they came to $305 million. Houston has proven to be quite efficient with his operations.
Issues With The Dropbox IPO
The Dropbox IPO does have its risks. One is the retention rate. According to Box Inc (NYSE:BOX) CEO Aaron Levie, it is estimated to be 60% to 70%. This means that Dropbox needs to constantly find new users to make up for shortfall.
No doubt, this is difficult as the cloud storage market is highly competitive. Just some of the rivals include biggies like Apple Inc. (NASDAQ:AAPL), Microsoft Corporation (NASDAQ:MSFT) and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL). These companies have the luxury of offering their services at low prices since they have other revenue sources to rely on.
In fact, it looks like the competition has been taking a toll on Dropbox. In 2016, revenues jumped by 40% but there was only an increase of 30% the following year.
Bottom Line on the Dropbox IPO
In the near-term, I think the Dropbox IPO will likely post gains. Keep in mind that institutional investors want to get exposure to next-generation tech operators. And there are few on the market right now.
The valuation is also in-line with other large cloud companies. Note that the Dropbox IPO trades at about 11 times revenues. By comparison, WorkDay Inc (NYSE:WDAY) is at 13X and ServiceNow, Inc. (NYSE:NOW) trades at 15X.
Although, when it comes to IPOs, the volatility can be stomach-churning. Just look at Snap Inc (NYSE:SNAP) and Blue Apron Holdings Inc (NYSE:APRN). In other words, if you are thinking of buying into the Dropbox IPO, it’s best to not to take too large of a position.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.