The initial public offering of Dropbox (DBX, Financial) was quite successful. Last Friday, its share price jumped by 35.6% to $28.48 in a single trading day. At this price, Dropbox is valued at $20.8 billion, and the offering was oversubscribed. At the same time, the overall U.S. stock market was in the red. This signals bullish momentum for the big technology company.
Dropbox started as an online storage business. It has more than 500 million registered users in 180 countries. Out of those 500 million users, 11 million are paying Dropbox to use its service. In 2017, Dropbox reported $1.1 billion in revenue. Around 90% of the total revenue came from self-served channels (meaning users purchase via app or website). In 2017, the average revenue per user was nearly $112.
Individual users do not have a lot of choices for the storage amount in Dropbox. Either they register as a free user and receive 2 GB storage, or they have to pay $99 per year to get 1 terabyte of storage. Many users would think 1 terabyte of storage is beyond their demand, but they have no other choices. Thus, most of the paying users are using Dropbox's 1 terabyte service. If it had other lower storage options for lower prices, the company would likely attract more paying users for its services.
Indeed, its business model of collecting users’ upfront payment leads to high level of cash, negative working capital and high deferred revenue. As of Dec. 31, 2017, its cash and cash equivalents were $430 million and working capital was negative ($222 million). The deferred revenue was as high as $419 million.
Ninety percent of Dropbox users’ data is stored on the company’s own custom-built infrastructure. The remainder of users’ storage needs is supplied by Amazon Web Services. The cost of revenue; research and development; and sales and marketing are main reasons for the negative bottom line. In 2017, Dropbox still generated a loss of $112 million. However, it reported positive operating cash flow of $330 million, due to high depreciation and amortization and stock-based compensation.
A significant worry is the company’s stock-based compensation. Dropbox's stock-based compensation was valued at $164.6 million, and the stock option average price was around $7 per share, only a fourth of the current stock price. Excluding the stock-based compensation, the company’s free cash flow was around $140.6 million.
Buying Dropbox shares at this price is speculative. It contains many characteristics of extremely high valuation. At $20.8 billion market value, Dropbox is valued at 148x free cash flow and nearly 19x sales. It popped nearly 40% in a single trading day, even though the whole market was in the red. Last but not least, the average exercise price of Dropbox stock options for employee is only a fourth of its current price.