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Is Dropbox's 2018 IPO likely to be a success? originally appeared on Quora: the place to gain and share knowledge, empowering people to learn from others and better understand the world.
Answer by Jeremy Arnold, Business analyst, on Quora:
Is Dropbox's 2018 IPO likely to be a success?
It depends how realistic Goldman and co. are in setting a fair valuation, and/or how clever they are at putting makeup on the pig.
To be clear, Dropbox is a fine business with a fine product. They’re just not worth nearly the $10 billion they raised at in 2014.
- They claim to be profitable. This is technically true, but largely misleading. They’ve turned a gross profit only, and even that likely depends on how you run the numbers. (They took out a $600 million line of credit last year, and that wasn’t just to pay the utilities. It’s easy to be “profitable” if you’re saddling yourself with cheap debt.)
- Last we heard from CEO Drew Houston (January of 2017), Dropbox was running at a $1 billion run-rate. We haven’t had an update since, but I’m skeptical that they’ve kept their 30% pace. They’ll continue to grow, but they’ve also entered maturity stage.
- As I went into in some detail here, their key problem is that they’re now directly competing with three of the most well-capitalized companies in history for retail customers. Their early lead, significant as it was, has since largely evaporated. Virtually every add-on product they came up with along the way was a miss, all of which pulled focus away from solving the one problem they still haven’t really solved (i.e., how to convert small businesses to paid accounts in significant quantities).
- Using back-of-napkin numbers, a fair valuation for a mature tech company is peak revenue x 2.16. Even allowing for generous growth assumptions, I struggle to see Dropbox ever crossing the $3 billion mark. Google, Microsoft, and Amazon are all coming for them (not to mention competitors like Box on the enterprise side).
Maybe there’s good news hiding somewhere, but I suspect their S-1 will be heavy on metrics like TAM (where they place focus on the growing size of the market and not their own relative stagnancy within it). I like their company, so I’ll be happy to be surprised — but it would be a surprise.
If Goldman can convince them of the virtue of reining in their runaway valuation (fixing their IPO somewhere between $5-7 billion), I’d expect that they’ll sell out comfortably. That said, they could probably be greedy and sell out anyway in this market. I just wouldn’t hold on to those hot potato shares for too long.
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