Is Dropbox’s Initial IPO Valuation Too High?

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The financial markets have eagerly been awaiting the initial public offerings of the so-called unicorn companies. These are the venture capital–backed companies that already commanded valuations of $1 billion and higher while they were being funded as private companies. One unicorn that is now set for a post-unicorn IPO is Dropbox.

The cloud-based data storage provider released an amended S-1 filing for its IPO on Monday, after its first IPO filing was made on February 23, indicating a value of $7 billion to $8 billion once its IPO comes to market. The filing is for 26 million shares in a price range initially set at $16 to $18 per share. Of that 36 million Class A shares being sold, Dropbox is offering to sell 26,822,409 and certain existing stockholders are offering to sell an additional 9,177,591.

Dropbox also will reverse-split the current shares outstanding to inside investors at a ratio of 1.5 to 1. The reverse split allows the company to set a higher IPO price without diluting insiders’ valuation.

Dropbox does have one of the complicated shares structures that have become more common of late with three classes of shares. The company claims to have more than 500 million registered users from 180 countries. It also claims to have over 11 million paying users.

Dropbox had revenue of $603.8 million in 2016, and that grew to $844.8 million in 2016 and $1.1068 billion in 2017. This represented annual growth rates of 40% and 31%, respectively. The company’s net losses were $325.9 million in 2015, $210.2 million in 2016 and $111.7 million in 2017. That said, Dropbox generated positive free cash flow of $137.4 million in 2016 and $305.0 million in 2017.

Another issue worth noting is that Dropbox has a massive group of underwriters. This list includes the likes of Goldman Sachs, JPMorgan, Deutsche Bank, Allen, Merrill Lynch, RBC Capital Markets, Jefferies, Macquarie, Canaccord Genuity, JMP Securities, KeyBanc Capital Markets and Piper Jaffray. That’s a total of 12 underwriting members in the syndicate.

Existing shareholders include many well-known names in the technology world, as well as funds managed by Sequoia Capital, Accel, Green Bay Advisors, T. Rowe Price and more. Salesforce Ventures also has been shown to have entered into an agreement with Dropbox to purchase $100 million of the Class A common shares in a private placement at a price per share equal to the initial offering price.

Its three classes of authorized common stock are Class A common stock, Class B common stock and Class C common stock. The company discussed these shares as follows:

The rights of the holders of Class A common stock, Class B common stock, and Class C common stock are identical, except with respect to voting and conversion. Each share of Class A common stock is entitled to one vote per share. Each share of Class B common stock is entitled to ten votes per share and is convertible at any time into one share of Class A common stock. Shares of Class C common stock have no voting rights, except as otherwise required by law, and will convert into Class A common stock, on a share-for-share basis, following the conversion of all outstanding shares of Class B common stock into shares of Class A common stock and upon the date or time specified by the holders of a majority of the outstanding shares of Class A common stock voting as a separate class. Following this offering, outstanding shares of Class B common stock will represent approximately 98.0% of the voting power of our outstanding capital stock.

One question worth asking is whether investors should be paying $7 billion or $8 billion for a company that was founded in 2007 and that is still losing money. Cash flow may be positive, but the losses need to be considered here. That being said, preliminary checks have already indicated that demand from investors for Dropbox shares will be strong.

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