The last few days have not been filled with good stock market news, but the Dropbox Inc (NASDAQ:DBX) IPO appears to be a rare glimmer of hope. As Yahoo News reported on Friday, “shares closed at $28.42, up more than 35 percent in their first day of trading on Friday” despite the S&P tech index falling by 2.73 percent. Dropbox is the largest tech company to go public since Snap Inc (NYSE:SNAP) last year.
I like Dropbox as a product, and think that it will continue to be successful, improve its financial numbers, and be successful over the long term. But Dropbox at its new stock price has a valuation of over $12 billion and this company is not worth that much. The stock will almost certainly fall in value eventually, and investors should wait until then.
Dropbox’s Success
From a certain perspective, Dropbox’s successful IPO may come as a surprise. Dropbox’s file-sharing service is not new technology. It faces plenty of competition from much larger competition like Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOGL). Why should it be expected to survive in the future against much larger competition?
The simple answer is because Dropbox has thrived so far. Dropbox states in its most recently amended SEC report that “Our revenue was $603.8 million, $844.8 million, and $1,106.8 million in 2015, 2016, and 2017, respectively, representing an annual growth rate of 40% and 31%, respectively.” While Dropbox suffered losses like most technology IPOs, net losses decreased in that same timeframe from $326 million to $112 million.
It is important to note certain things about both figures. For revenue, Dropbox’s total numbers of users and its average revenue per user have stayed roughly the same for the past few years. Dropbox’s revenue increase has come from turning free users into paid users, with 6.5 million in 2015 and 11 million in 2017. As Dropbox has about 500 million users, it has plenty of room to grow through this path.
For net losses, the interesting thing is that while Dropbox’s operating expenses rose, its cost of revenue declined despite the higher revenue from $407 million to $370 million. This decline was caused by an “infrastructure optimization” which as GeekWire reported was caused by Dropbox moving from Amazon (NASDAQ:AMZN) Web Services to its own custom-built infrastructure and software. With that optimization finished, we could see cost of revenue rise again, though it may be offset by Dropbox not needing to spend so much in fields like R&D.
High Valuation?
Dropbox may face competition, but it offers a successful product which has let it succeed so far and give it room for further growth. But is it really worth its initial IPO valuation of $10 billion, let alone the $12 billion it currently sits at? Jim Cramer, while optimistic about Dropbox’s future, did note that Dropbox “trading at 8.5 times next year's sales estimates and 124 times 2019 earnings estimates.”
The primary argument for why Dropbox could be worth that eventually is to look at its current growth. If Dropbox continues to maintain its current revenue growth up to the point where it reaches $2 billion in revenue and have over 20 million users, if it can continue to keep cost of revenue down or spending down in general, and if it can become a truly profitable company, it could be worthy of that value in a few years. And of course, its competitors could decide to buy out Dropbox.
But those are a lot of ifs, and it is more reasonable to expect things to go wrong especially in a market which has seen some recent negative downswings. Dropbox could have a bright future, but that is not enough to justify its present value.
Be Careful
There is no denying that buying Dropbox at its current share price is a riskier venture than it was for those with the connections and funds to get in early. Dropbox is benefiting from users eager to jump in on the first tech unicorn over the year, and they will likely fade away given that other tech IPOs like Spotify will soon be on the market as well. And once the lockup period expires in a few months, I expect Dropbox’s initial investors to cash out and the stock to fall as a result. But there are reasons to feel confident about Dropbox’s potential given how it has thrived so far, and buying the stock at that point could be a valuable investment. Bolder investors can consider jumping in now and it may work out. But IPOs are tricky affairs, and it is better to be patient and wait for more data.