Dropbox: Steep Valuation Could Complicate The IPO

  • The leading cloud storage provider, Dropbox, is expected to go public next year.
  • Dropbox has increased revenues and user base significantly every year.
  • Based on the series C share price, Dropbox IPO price might reflect a P/S ratio as high as 30.
  • A reverse stock split could result in lower, more reasonable valuation levels, but the hype and buzz around the IPO might drive high demand that would push up the Dropbox opening price.
Dropbox IPO analysis

Dropbox, a cloud storage provider, is expected to go public next year in a very high-profile IPO. The San Francisco-based company, which has nearly 300 million users worldwide, provides file sharing and synchronization services to individuals and businesses. Dropbox is a cloud storage market leader that competes with tech giants such as Google (NASDAQ:GOOG) with Google Drive, Microsoft (NASDAQ:MSFT) with OneDrive, and other cloud storage providers such as Citrix (NASDAQ:CTXS) and Box (NYSE:BOX).

Dropbox’s cloud storage rival, Box filed for an IPO earlier this year, masking rapid revenue growth coupled with high operating loss. These two companies use different storage processes: Box users are required to upload/download files from a particular online library while Dropbox users create a unique folder on their computers that is used for cloud storage and is synchronized with Dropbox. Both of the companies have similar freemium business models in which registered users receive a storage space of a few GBs, and additional storage or users require a small payment.

Dropbox was founded in 2007 as a Y combinator start-up and quickly became a hot name in the start-up industry. Dropbox became such a big trend that only two years after it was founded, its founders turned down a nine digits offer from Apple to acquire the company. Dropbox is currently valuated at $10 billion and joined the club of start-ups that are worth more than $10 billion - together with Uber, Airbnb, Snapchat, and Xiaomi - the Apple of China which are some of the hottest upcoming IPOs.

Dropbox Growth

Dropbox revenue and user base figures are still vague as the company has not filed its S-1 yet, and keeps these numbers confidential. However, a few public interviews, press releases, and company events helped to shed some light on Dropbox’s revenues and user base growth. As shown in chart 1 below, Dropbox increased its user base rapidly from only 2 million registered users to more than 300 million in 2014. The impressive user growth is also reflected in the company’s revenue, increasing from $2.5 million in 2009 to $325 million in 2014 (mid-point of analysts’ estimations).

Dropbox IPO_LR_Chart 1

Funding and Valuation

Dropbox raised more than $1 billion in five funding rounds: four equity rounds in which the company raised $582 million and one debt series in which the corporation received financing of $500 million. As shown in chart 2 below, the Dropbox valuation grew from $120 million in series A to $10 billion in the last round, making it one of the highest valued start-ups in the world. At the same time, the stock price increased sharply from $0.06 in series A in June 2007 to $19.10 in series C in April 2014. Dropbox's early shareholders include leading venture capital funds such as Benchmark, Index Ventures, Sequoia Capital and Accel Partners, as well as leading investment banking institutions such as Goldman Sachs, BlackRock, and T. Rowe Price.

Dropbox IPO_LR_Chart 2_v2

Dropbox IPO Price Estimation

The series C share price of $19.10 reflects a P/S ratio of 30 to Dropbox, much higher than the P/S ratio of other cloud storage vendors. Dropbox's rival, Box, filed an S-1 earlier this year and presented a P/S ratio of 16.5, Citrix has 3.29, Google 5.11 and Microsoft 4.28 making Dropbox's valuation pretty steep compared to other players in the market. The Dropbox P/S is not only higher than other cloud storage competitors but also greater than other SaaS / big data vendors that went public lately: Hortonworks (NASDAQ:HDP) has 21, New Relic (NYSE:NEWR) has 5.78 and Workiva (NYSE:WK) has 2.45.

The high valuations of Dropbox might not leave much room for additional upside for investors after the IPO. In order to attract investors, the company will either perform a reverse stock split to reduce multiples while compensating existing investors, or try to boost the hype around the company further in order to succeed in an even higher IPO valuation.

A reverse 2:1 stock split will cut the number of Dropbox’s shares in half and double series C share price from $19.1 to $38.2. However, to improve valuation and multiples, Dropbox should artificially reduce its share price by offering a 50% discount to its current shareholders. The company will need to offer shareholders a proper compensation such as warrants, improved conversion rate of preferred to common stocks, better price at conversion, etc. This move will reduce company’s market share from $10 billion to $5 billion and with trailing twelve months revenues unchanged Dropbox’s P/S ratio will improve from 30 to 15. A similar reverse 2:1 stock split coupled with a 50% discount was a key driver in Hortonworks IPO success. Following the high valuation of Dropbox this move might be the only way to make this IPO more appealing for investment.

The updated P/S ratio of 15 is still higher compared to Dropbox’s competitors and the company should offer some discount on its series C share price (post reverse stock split) to attract institutional investors. As the IPO will be accompanied by hype and buzz in the media, the company will probably receive high demand for its stocks and institutional investors could settle for a minimal discount of 10% off the updated series C price, under the assumption that they could sell it to the public at a much higher price. A 10% discount of series C price post the reverse stock split set the lower bar of the range at $35.

The higher bar of the price range can get up a 16.5 P/S ratio  in order to remain competitive with the upcoming Box IPO. A P/S of 16.5 to Dropbox reflects a share price of $41 which will be the higher bar of the price range.

The range mentioned above is targeted to attract institutional investors to the pre-opening bid and will assist the company to boost the opening price to the top of the range. According to the interest around Dropbox IPO, a scenario in which Dropbox’s opening price goes up to $50, which reflects a P/S of 20 and market cap of $13 billion is feasible.


Cloud storage company Dropbox is expected to go public next year. The company presents impressive growth rates in revenue and user base; however, its high valuation might be difficult to sell to investors during the IPO. Dropbox is valued at $10 billion, which reflects a company P/S ratio of 30 that is 2x the P/S ratio of rival Box, 6x and 10x that of Google and Citrix, respectively.

Because Dropbox's valuation is high, the company may attract institutional investors to the pre-open bidding by providing discounts on a series C share price. The hype and buzz around the company may lead to a high opening price for Dropbox, leading to high first-day prices for the cloud storage company and driving it onto the over-valuation turf. Investors should make sure that they purchase Dropbox stock at a reasonable P/S ratio (probably, somewhere between 16 and 20) in order to benefit from the upside in the stock price in the future. Once Dropbox has released its official S-1, I will revisit this analysis.

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