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Boxing match: How cloud storage players Dropbox and Box stack up

March 16, 2018

Dropbox (DBX) plans to raise as much as $720 million in the largest IPO from a US tech company since Snap (SNAP) in the 1Q17. The company raised its price range this week in a sign of high demand, and is now scheduled to begin trading on the Nasdaq on Friday.

Valued at $10 billion in January 2014, Dropbox's offering will set the tone for other tech IPOs with high valuations and heavy losses. At the high end of the revised $18 to $20 range, it would command a fully diluted market value of $9.0 billion and an enterprise value of $8.4 billion.

Fellow cloud storage provider Box (BOX), which IPO'd in early 2015, is a natural comp for evaluating Dropbox's valuation. Both are leaders in Gartner's Magic Quadrant for Content Collaboration Platforms.

At $20, Dropbox is being pitched at 7.6x trailing sales, a premium to Box's 5.9x. That's not surprising given Dropbox's larger scale, faster growth, and greater profitability. However, we note that Dropbox's consumer-based model differs from enterprise-focused Box. Unlike Box, Dropbox cites high-growth collaboration software provider Atlassian as a competitor, which also has a low-touch sales model (and a much higher multiple at 17x LTM sales).

Dropbox vs Box

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Dropbox's key selling points
Dropbox has $1.1 billion in annual sales with 28% MRQ growth. That's a rare opportunity: in the past three years, only five tech IPOs (5%) had over $1 billion in LTM sales, and of those, only Square (SQ) had 20%+ growth. Gross margin has doubled over the past two years to 67% in 2017, and should continue to rise. Its freemium model improves the bottom line; 90% of revenue is generated from self-serve channels, and sales and marketing expenses as a percent of revenue are less than half the level of Box. That has led to an attractive free cash flow conversion, pulling in $260 million in 2017. High-growth tech IPOs have outperformed; since 2015, the 55 software IPOs have averaged a first-day pop of 26%, and a total return of 110%. And in a vote of confidence, shareholder and partner Salesforce is investing $100 million in a concurrent private placement at the IPO price.

How Dropbox could eventually drop

Dropbox's main competition includes Google, Amazon, Apple and Microsoft. That is a daunting group with extensive resources and near-ubiquitous consumer presence through hardware and online accounts. Insiders are selling 25% of the IPO, including the founder and CEO. While improving, operating losses are still massive at -$114 million in 2017, along with a titanic $1.5 billion accumulated deficit. As Blue Apron (APRN) and Snap showed last year, highly-valued, highly-unprofitable companies can crash through the floor of peer multiples.

Dropbox Financial Summary