What You Need To Know About Dropbox’s Oversubscribed $750 Million IPO
It is already turning out to be an exciting and busy year on the Initial Public Offering (IPO) front, the first quarter having registered more multibillion-dollar listings than the whole of last year. Dropbox’s $750 million IPO has already painted a clear picture of what investors should expect going forward.
The second quarter looks set to register a substantial amount of IPO listings, considering 43 IPOs took place in the first quarter. Spotify is one of the IPO’s that investors are looking up to in the second quarter.
Amidst the flurry of activities, Dropbox continues to elicit mixed reaction on Wall Street on opening 30% up its IPO price of $21, on the first day of trading.
Dropbox was set to go on sale for between $16 and $18 a share. However, a strong demand from institutional investors forced the company to raise the price to $21 a share as investment bankers sought to take advantage of the strong demand.
Dropbox’s IPO sought to offer 36 million shares with underwriters given the option of buying an extra 5.4 million shares.
The Cloud storage company IPO was oversubscribed as investors raced to get a piece of the first big tech IPO this year. Its stock started trading with a non-diluted market cap of about $8 billion before skyrocketing to 12.25 billion above its last private valuation of $10 billion.
Data Privacy Concerns
The cloud storage company had been reluctant to go public despite commanding a respectable valuation as a private company. While the move opens the door to for the company to raise much-needed funding to accelerate growth in the cloud storage business, there is still some growing concern about what the future holds.
Snap another high profile private company saw its outlook take a hit after transitioning to a public company. The photo-sharing app has not had the best of runs ever since it became a public company, last year. There is fear that the same fate could befall Dropbox, given that it also enjoyed the same hype before going public.
The big question now is how the stock will fare given that tech companies have come under pressure in the recent past in the wake of Facebook’s data privacy scandal. Given that Dropbox also deals with people’s data, it could come under immense scrutiny going forward, a move that could affect its sentiments and outlook on Wall Street.
Dropbox’s Investment Value
With Dropbox, now operating as a public company it might wise to first carry out a detailed analysis of the company’s business operations and returns, before investing any hard earned money in the stock.
One of the reasons why Dropbox looks like a good IPO has to do with the fact that it is selling ordinary Class A shares that come with one vote per share.
Unlike other companies that have carried out IPO’s in the recent past, Dropbox spends a good chunk of its capital on areas that are likely to improve its future results i.e. Research and Development and Sales and Marketing
General and Administrative expenditure only account for a small percentage of its total expenditure.
Dropbox’s top and bottom lines
Dropout generated revenues of $1.1 billion in 2017 representing a 30% increase from 2016 levels. As of the end of last year, the cloud storage company had about 11 million paying users out of 500 million people using its services.
Free cash flow generated in 2017 stood at $330 million an increase from $252 million generated in 2016. Average Revenue Per User (ARPU) dropped to $111 in 2017 from $113 as of 2015. Gross Margin, on the other hand, doubled to 66% as the cost of revenue fell to $369 million from $391 million.
What the Numbers Mean
A closer look at the numbers, it is clear Dropbox has a healthy business as it begins life as a public company. With its cash holdings growing at an impressive rate, it is clear the company is in the best financial state to pursue acquisitions that would strengthen its cloud storage business.
The company has already shown that it can go all the way, on its own, rather than depend on other tech giants for growth. Last year it completed a move from Amazon’s Simple Storage Service. It has since leased colocation space as well as embarked on a data center building spree as it looks to be independent when it comes to storage infrastructure.
Dropbox is not your typical cloud storage startup. It boasts of Exabyte, which is one quintillion bytes, worth of storage enough to support any data storage demands going forward. The company was able to spend less on storage space last year given its storage capacity considerably helping strengthen its gross margins.
The company has started to prune inactive customer base in a bid to relieve some storage space that could be used to generate value in other ways.
Another reason why Dropbox looks like a solid bet in the cloud storage space, has to do with the fact that it boasts of some of the best talents in the cloud business. Being able to move one Exabyte of data from Amazon Website Service without any interruption is a feat that very few companies can achieve.
It goes without saying that the company has the technical know-how, capable of matching the likes of Google, Amazon, and Microsoft, crucial to strengthening its prospects in the industry.
One of the biggest investment risks with Dropbox has to do with reduced spending on marketing for drawing in new customers. The company is reportedly focused on grooming the 500 million people currently using its service with a view of getting a good number of them transition to paying subscribers. The result has been slow growth.
Dropbox might have to rethink its marketing strategy given that it needs to reach out to corporate clients who can spend more. This is the only way it will be able to grow its Average Revenue per user faster.
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