Dropbox IPO - a quick read of the S-1 form

This is quick. While I was critical of the IPOs of both Snap Inc. and Blue Apron based on their S-1 forms, 3 minutes into reading Dropbox's S-1 form made me realize that there's nothing to criticize here. A solidly growing business. No tricks. No fanfare. Just numbers. 

In fact, you might even call Dropbox's S-1 boring, as I were able to go through the whole thing in 1 hour without catching anything suspicious.

 Operating performances of Dropbox in the last three years

Operating performances of Dropbox in the last three years

Some points:

  • Solid revenue growth
  • Free Cash Flow has already turned positive for 2 consecutive years and has grown to almost 30% of the revenue in the year of 2017.
  • Net income is still negative due to the expenses related to stock-based compensation, which is linked to its high private-round share prices.

Compare this to its arch rival BOX, which went IPO in January 2015:

 Operating performances of Box in the last three years

Operating performances of Box in the last three years

As you could see, the enterprise-focused Box, which went IPO too early but out of capital needs, showed healthy growths and should turn FCF-positive in the last fiscal year (ending on 2018/1/31). However, Dropbox is significantly better in all figures.

 Dropbox versus Box: Sales & Marketing expenses

Dropbox versus Box: Sales & Marketing expenses

One problem that Box has had since data were made public when it IPOed in 2015 was that it needed to spend a lot of sales money to get clients to sign. This seems to remain true even after 3 years of IPO. For comparable reason we showed the year 2016 where Box spent about 63.5% of its revenue in sales & marketing, while Dropbox only spent 29.7%.

Overall Dropbox should have a very smooth (almost boring) IPO, provided pre-IPO investors don't go nuts in overpricing the stocks during book building, as they did in Snap Inc's and Blue Apron's IPOs. 

Dropbox is raising $500M in this IPO, but it still has over $400M of hard cash on the book and its Free Cash Flow is positive in the range of $300M. Therefore this IPO is not for need of capital, but to provide liquidity to the employees and VC shareholders for a company founded in 2007.

Given that with roughly 1/3 the revenue level and worse figures across the board, Box's market cap is about $3B now. It's very likely that Dropbox could IPO at valuation higher than $10B, its last round valuation established 3 years ago.

 Cap table of Dropbox

Cap table of Dropbox

If that happens, both co-founders stand to become billionaire, while Sequoia Capital, currently holding 23.2% fully diluted, stands to walk away with more than $2B as well.

Curiously enough, Y Combinator is not featured on this table. Given that the smallest shareholder on the table, T. Rowe Price, has 3.5%, we could infer that YC holds less than this. A 1% ownership (which is already kind) would give YC $100M return provided Dropbox IPOs at $10B. Not too shabby for a hundred-thousand range investment many years ago.

 

 

 

 

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