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In 2007, Dropbox answered the question no one knew they had, “How do you get all your files, from all your devices, into one place?” After becoming frustrated with keeping up with his digital documents via thumb drive or emailing himself, Drew Houston, now CEO and Founder of Dropbox, decided that “life would be a lot better if everyone could access their most important information anytime from any device.” Out of that frustration Dropbox, a cloud-based file storage service, was developed. Dropbox has been the pioneer of “worldwide adoption of file sync and share software.” Eleven years later, the service continues to host documents and has expanded to “keeping teams in sync.” Today, Friday, March 23, 2018, Dropbox’s highly anticipated initial public offering (IPO) hits the market. But I have questions and you should too.
Was Steve Jobs right?
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In 2009, Steve Jobs told Drew Houston that Dropbox was more of a feature than a product or business. Seven years later, with more than 500 million registered users, over $1 billion in revenue, 400 billion pieces of content, Friday’s multibillion-dollar IPO seems to rebuff Jobs. Or is it?
In their conversation, Jobs shared that Dropbox would be at a disadvantage because it didn’t control an operating system. From Houston’s account, Jobs inquired about acquiring Dropbox, which he quickly refused. After their meeting, Houston was convinced that Apple had the intent to kill Dropbox.
In 2011, iCloud was introduced as “a breakthrough set of free new cloud services that work seamlessly with applications” on Apple products “to automatically and wirelessly store your content in iCloud and automatically and wirelessly push it to all your devices.”
Dropbox has expanded its business beyond file storage into “content collaboration.” But in its IPO documents, it conceded that there is no shortage of competition, especially big players, in this space. Dropbox notes that it not only competes with Apple but Amazon, Alphabet (Google), Microsoft, Atlassian, and Box. To be successful in these “competitive markets” they “must continue to compete effectively.” Dropbox finds that factors which include “user-centric design,” “brand,” and pricing are its “principal competitive factors in [its] market.” Unfortunately given the impact and overlap of the competition, iCloud may not have “kill[ed]” Dropbox, but it has possibly opened it up to a slow death.
Has increased competition decreased Dropbox’s valuation?
The specter of competition might be the cause of Dropbox’s drop in valuation. In 2014, Dropbox was touted “as the most highly valued venture-backed company after reportedly raising $250 million at a $10 billion valuation.” But even after an increase of half of a billion dollars in revenue between 2015 and 2017, it is only valued today at a generous $7.8 Billion. (Dropbox’s initial IPO valuation was between $6.2 Billion and $7 Billion but increased with its March 21, 2018, SEC filing).
Does Dropbox have the ability to be profitable?
Dropbox’s revenue has increased an average of 35% over the last three years. However, even with the increase in revenue, Dropbox has continued to post a net loss. In 2017, its net loss was $111.7 million. Optimistically, Dropbox appears to be on schedule to finally realize a profit. This timeline may be pushed beyond 2018 with the cost of the IPO.
The biggest concern is the company’s viability over the long term. The risk factors as enumerated in its IPO documents loom ominously in the background. Not only has the company’s “revenue growth rate has declined in recent periods,” but Dropbox’s future growth of the company “could be harmed if they fail to attract new users or convert registered users to paying users.” Currently, Dropbox hosts several million non paying users. In the face of competition, it seems unclear how Dropbox is going to be able to convert or attract in a meaningful way. Growth hacks can only go so far. Dropbox might be forced to spend real money on sales and marketing which could further dampen revenue growth.
Is it fair to severely limit the voting power of public shareholders?
In July 2017, the S&P 500 decided to exclude companies with “multiple share class structures” because they “treat different shareholder classes unequally with respect to voting rights and other governance issues.” This decision affected Snap directly but will also affect Dropbox.
Dropbox has a tiered common stock structure— Class A Common Stock, Class B Common Stock and Class C Common Stock. Class A stock is entitled to one vote per share, and Class C stock has no voting rights excluding what is required by law. The overwhelming majority of voting power is vested in Class B shares which, as disclosed in its IPO documents, represents approximately 98% of the voting power.
The purpose of the share classes is to insulate the company from a buyout. But it effectively excludes Dropbox from an “important milestone for young companies” inclusion in stock indexes. This exclusion has the potential to limit shareholder value over the long term.
What’s the bottom line?
Some businesses were meant to be acquired. It appears that Dropbox, like Snapchat, is one of them. Although Dropbox provides superior products, Houston’s desire to be a standalone company could eat away at the company’s bottom line. The intense competition has affected the company’s valuation and will continue to do as Dropbox takes on more expenses as a publicly traded company. This company is one to watch, from afar. If you are still interested in grabbing Dropbox, you can receive $5 towards your purchase at Stockpile.