Will Dropbox IPO in 2017 Be Worth Your Money?

Dropbox IPOAll Eyes on Dropbox IPO in 2017!

It is the year 2009. Apple Inc. (NASDAQ:AAPL) CEO Steve Jobs has invited two young MIT alumni to Apple’s Cupertino headquarters. Jobs tables an offer to buy their then little-known startup. But the young men refuse it. They are ambitious to grow it into a big company.

Just pause and think about it. Who declines a blank check from a tech giant like Apple? Well, what do you know! Eight years later, many are anxiously waiting for a Dropbox IPO so as to get their hands on Dropbox stock.

Drew Houston and Arash Ferdowsi will always be remembered in history as the two young lads who refused to play ball with the mighty Steve Jobs. But they will also be celebrated for their show of tenacity and perseverance. After all, we applauded the precedent set by Mark Zuckerberg when he turned down a billion dollar offer from Yahoo! Inc. (NASDAQ:YHOO), and gave investors a glorious IPO.

Stories like these are not shared merely for motivation. They are shared to give investors a peek into the companies’ c-suites. Investors reserve the right to know who’s running the show behind their investments.

After all, these companies can’t think for themselves. It’s these founders-cum-chiefs who set the course for these companies. If the reins end up in the wrong hands, the business goes off course and so do our investments. History is littered with such examples. Just recall what happened to the once-dominant BlackBerry Ltd (NASDAQ:BBRY) and Yahoo!

Case in point; Dropbox is in good hands. But even the best of captains cannot save a sinking ship. So before we get to Dropbox’s IPO, it is imperative that we first analyze if the business model is worthy enough to stand the test of time.

Will Dropbox Stock Be Worth Your Money?

A bajillion business ideas are formulated in Silicon Valley every year but only a handful of them live to see the light of day. That’s because, unless your idea solves a real problem for its user, nobody is going to buy it. Even a fashionable idea will eventually fade.

Back in 2008 when Dropbox was founded, it solved an actual problem many faced. Our smartphones carried a lot of data that was gobbling up all of the internal space. And for slackers like myself, connecting them to our computers every now and then just to transfer that data was a hassle.

Let me share with you an anecdote. When I first used the app some four years ago, I was instantly hooked. It had a minimalistic design and a super user-friendly interface. Plus it came with free space. That’s all I needed.

I liked to think of it as my little “safety box” where I could “drop” my important files anytime and anywhere—hence the name Dropbox, duh!

But I wasn’t alone. A lot of my friends had downloaded the app and we were actively using it to share nearly everything from photos to ebooks, videos and documents.

Basically, the company had used an ingenious marketing ploy. Dropbox gave away 250 megabytes of free storage to its initial Dropbox users. Back then, it was a great incentive for those initial users to join in and share it with their friends—a loose application of what B-schoolers call “viral marketing.”

That little gimmick of free storage and free sharing is what lent to Dropbox’s meteoric rise. Today, that threshold has been pushed up to two gigabytes of free storage.

Long story short; this free file-sharing cloud application became an instant hit for its slick design and easy use. Since then, Dropbox has continued to pull in more and more users. Today, this application has garnered a solid registered user base in excess of 600 million.

dropbox registered user chart

(Source: “Number of Registered Dropbox Users from April 2011 to March 2016 (in millions),” Statista, last accessed on April 19, 2017.)

But like all success stories, this one too comes with twists. When Houston and Ferdowsi refused to sell their idea to Jobs, the latter took matters in his own hands. Within two years, Apple launched its cloud service—the “iCloud.” Then came blows from other competitors like Google-parent Alphabet Inc (NASDAQ:GOOGL), Microsoft Corporation (NASADQ:MSFT), and Box Inc (NYSE:BOX)—all of which showcased their new and improved file-sharing cloud services.

Dropbox had no choice but to span out. So it tweaked its strategy a bit. The company added B2B (business-to-business) marketing to the mix.

Simply put; Dropbox has now created a separate product line to particularly attract small- and medium-sized businesses, called “Dropbox Business.” This new venture helps businesses shift all of their data to Dropbox’s cloud, where business teams can access it from any device anywhere in the world. The cloud creates a neat and engaging collaborative space for business teams. And of course, it’s monetized. So this is where Dropbox’s major chunk of revenue comes from.

In other words, the company has moved beyond individual users to bigger clients. Dropbox has managed to draw in some big names to Dropbox Business, like Expedia Inc (NASDAQ:EXPE), News Corp (NASDAQ:NWS), and Spotify.

But again, competition is right at its doorstep. Microsoft’s “SharePoint” and Google’s “G Suite” are doing exactly the same, are profitable, and are better positioned to thwart competition. Likewise, the two new Dropbox products–“Dropbox Paper” and “Dropbox Smart Sync”—also face competition from the likes of Mozy and Box.

The question that prospective Dropbox stock investors will need to ask after Dropbox IPO in 2017 is; how many more “paying” clients will it be able add to its platform in a cut-throat environment?

It is no revelation that stiff competition stifles growth of any business. Dropbox is no different. Returning profits in such a competitive space could be particularly challenging for a company that has yet to make money.

Will Dropbox IPO in 2017?

Rumor has it that Dropbox founders met with advisers in the last quarter of 2016 to consider going public. So chances are that we might see a Dropbox IPO later this year.

Although, that may be a major departure from Houston’s plan of staying private. Recall how Dropbox’s biggest competitor Box Inc went public in 2015 and the IPO was a big flop. Post that debacle, Dropbox founders were not very keen on taking the company public.

So we don’t yet have a final Dropbox IPO date yet but we may be in a position to speculate the IPO price, given peer valuations.

Dropbox was given a questionable valuation of $10.0 billion back in 2014 when the company was burning cash. The good news is that the company turned cash flow positive last year. This could reflect positively on the Dropbox IPO valuation.

Now, Dropbox rival Box went public with an IPO price of $14.00 per share. But since Dropbox is being touted as a hot IPO much more valuable than Box, we can compare it to another hot IPO of this year—Snap Inc (NYSE:SNAP)—which IPOed for $17.00 apiece. So, I’m safely predicting a median IPO price between this range.

Bottom Line on Dropbox Stock Post Dropbox IPO

Now, 2016 was annus horribilis for the IPO market. But this year is already turning out to be spectacular. The Snap IPO was just the beginning. Anticipations are mounting for future IPOs, including big names like Uber Technologies, Inc., Airbnb, Spotify and Buzzfeed. Dropbox is also on the same list.

Now, I hate to say this, but I’m having a deja vu moment right now—reminiscing about memories from 1999. Dozens of IPOs of unprofitable internet companies with lofty valuations were the impetus for a cataclysmic disaster we remember as the dot-com bubble.

If there’s anything the dot-com saga has taught us, it is that such IPOs are overvalued. This is why most IPOs turn out to be duds. After the market frenzy settles, the overpriced stocks head for correction. It makes sense. After all, if they were cheap, Wall Street wouldn’t be selling it. Not me but the investment maestro Warren Buffett says so.

This is why I take IPOs with a grain of salt. I believe the best time to consider investing in a new public company is after at least two quarters of business when you can get a hold of its financials and get a good idea of where it’s heading.

In a nutshell, Dropbox founders have proved their mettle. Now all they have to prove is that their business is worthwhile. I’ll be closely watching Dropbox stock post Dropbox IPO, and so should you. We might be happily surprised.