Dropbox Inc was valued at $10 billion in the last funding round, which many think is too expensive.
Dropbox is believed to be a step closer to file for its IPO. The cloud storage provider is reportedly hiring Goldman Sachs as the lead advisor for its potential IPO. Dropbox is working with Goldman Sachs to prepare documents for an IPO that could be filed as soon as this year. If all goes well, Dropbox IPO could be the biggest tech IPO since Snap Inc (NYSE:SNAP) went public this March.
The Dropbox IPO has been long coming. Founded in 2007, Dropbox was a pioneer in the cloud storage market when it made unlimited online storage accessible for consumers at reasonable prices across many devices, eco-systems, and operating systems. The company had entered into a significant number of partnerships that enabled it to expand its offering substantially.
However, the company was hit by the commoditization of the cloud storage offering after tech giants such as Alphabet (NASDAQ:GOOGL), Microsoft (NASDAQ:MSFT) and Apple (NASDAQ:AAPL) decided to throw in their hats in the cloud storage space. This forced the company to differentiate itself with an enhanced portfolio of services and options. Dropbox shifted its focus to enterprise services and started emphasizing on its technology — specifically in terms of speed and simplicity. The company has also tried to move beyond storage by launching new products like Dropbox Paper, an alternative to Google Docs. The company has also been making several acquisitions to diversify its offerings. According to CrunchBase, Dropbox has made 23 acquisitions till date.
By the looks of it, the company is doing well. Dropbox took the second place in Forbes Cloud 100 which claims to recognize "the best and brightest of the cloud". This list tracks candidates by operating metrics such as revenue and funding, with the help of 25 of their public cloud CEO peers. More than 500 million people use Dropbox today to share files.
Dropbox Funding History
Dropbox has raised over $600 million in five funding rounds. The company had raised $250 million in a Series B funding round led by Index Ventures, back in October 2011. The Series B funding round had valued Dropbox at $4 billion, vaulting the file sharing company into the exclusive "Unicorn" club. In January 2014, in a funding round led by BlackRock, the company raised $350 million at a sky high valuation of $10 billion. The company's valuation has increased 2.5X in less than two and half years. The company has not raised any more equity since then, primarily because of the fear of a down round. Several tech "Unicorns" were forced to take a down round after 2015, as the euphoria in the venture capital and IPO market receded. Proceeds from technology IPOs slumped to $6.7 billion in 2015 from $34 billion in 2014, and shrank further to $2.9 billion in 2016, according to Thomson Reuters data. However, Dropbox did manage to raise $1.1 billion in fundings, $500 million in 2014 and $600 million in 2017 April.
Dropbox's road to IPO
Ever since Box Inc (NYSE:BOX) went public in 2015, analysts have been keenly waiting for Dropbox to hit the market with its IPO. While Dropbox has remained patient, it has been making several moves and preparing investors for the IPO. The company has been regularly releasing key financial data to the market (obviously the ones which paint a healthy picture of the company) over the last one year or so. In June 2016, the company announced to the Wall Street that it has become cash flow positive, a key milestone for any company. In January this year, Dropbox CEO Drew Houston announced that the company has hit $1 billion annual revenue run rate. But most important of all, in April, the company announced that it had achieved positive EBITDA (excluding share based compensation).
EBITDA is a keenly watched metric, especially for young tech companies. Of late, the market is showing lesser tolerance for companies who are reporting weak EBITDA. Several big U.S. technology companies such as Uber Technologies Inc and Airbnb Inc have resisted going public in recent months, due to the concern that stock market investors focus more on profitability than do private investors and are likely to assign lower valuations to them. The struggles of companies such as Snap and BLUE APRON HLDG (NYSE:APRN) are a case in point. Blue Apron stock is down 48% since its listing a month back while Snap stock is down 44% since IPO. SNAP stock closed another 14% lower in after market trade yesterday after a poor earnings performance. Given such bloodbath, it was good for Dropbox to focus on profitability before hitting the market.
The last funding round, back in 2014, had valued Dropbox at $10 billion. However, those were the hey days of "Unicorn" euphoria. Many consider that valuation to be highly excessive. We can try to value Dropbox using Box valuation as a proxy. Box Inc is currently trading at a twelve-month trailing PS (Price to Sales ratio) of 5.68x. If we apply the same valuation multiple to Dropbox's $1 billion annual revenue run rate, then we a get a $5.68 billion valuation for Dropbox, which is massive 43.2% drop from its previous valuation of $10 billion. Interestingly, according to Wall Street Journal, Dropbox stock had suffered a similar fate in the private market. Dropbox share price dropped from $19 in Q1 2014 to an average price of $10.16 in Q2 2016 which reflects a huge decline of 46% in valuation.
However, we must recognize that the company is now profitable on adjusted EBITDA basis and claims to be growing at a rapid pace. "It’s rare for software companies to be operating at our scale with our level of profitability and to be growing at the rate that we are," CEO Houston had said in an interview with Bloomberg Television. This is likely to earn Dropbox higher valuation multiple than what market is assigning to Box stock. However, it is also likely (more than likely actually) that Dropbox will list at a lower valuation than what was assigned to it during the previous funding round. Dropbox's main competitor, Box, was valued at roughly $1.67 billion in its IPO in 2015, which is below the $2.4 billion valuation assigned to it in the previous private fundraising rounds. However, we will have to wait for the actual filings to get the exact picture of Dropbox's financials and take a call on whether to invest or "drop" out of its IPO.
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