10/27/12

In our post-Facebook IPO world, investors are understandably weary when it comes to valuations of tech companies that seem hyper-inflated. In this recent discussion that I came upon, the question was raised of whether Dropbox deserves the $250 million that it has thus far raised from investors. The company, valued at $4 billion, maintains a business model where 96% of customers use the service for free and those who pay are only charged around $10 a month.

Those who support the numbers say that the company should be valued on more than just past performance and financial health; growth potential, exit options, etc. are crucial factors in an evaluation of Dropbox. Plus, the numbers aren't that bad. Here's what one response had to say:

Let me do a quick back of the napkin calculation. They have 2 million paid users who pay $120 per year. That gives them $240 million revenue. Then there is a business version that cost upwards of $800 per year. Dropbox claims that they have 2 million businesses signed up. So, their total revenues could be anywhere above $400 million ($240m + 2m*$800) . That's awesome for a 4 year old company.

While the company certainly seems promising, I can't see it being worth $4 billion. An annual revenue of 240 million in 2011 is hard-pressed to equal even a billion dollar valuation, despite the growing potential of cloud computing. Similarly, as the market gets more saturated, it will be exceedingly difficult for Dropbox to keep its client base without gaining a drastic technological advantage over its competitors.

Of course, I'd love to know if you guys think the math adds up.

Comments (12)

10/26/12

I imagine most people use Dropbox in the same way I do - syncing documents and PDFs. I've used less than 2% of my 3.0gb free allowance and cannot see any reason why I would upgrade. This ties in nicely with your statistic of 96% of users not paying a penny. Even if Dropbox expands to a BILLION users (and pricing / % people using it free remains the same) thats still only $400m in revenue.

Unless they can figure out a way to really monetize their users without forcing the user to pay (because there are a ton of other free equivalents out there, iCloud, Google Drive, SkyDrive just to name a few) then I can't see how they could ever justify a $4bn valuation. Having said that I have no idea what their margins are although I imagine they aren't fantastic.

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10/26/12

google drive will kill them

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10/26/12

I think it's overprice...but then again I know some people who use it for work. One of them have like 2TB of data on there...that is a ton. If they can market well to businesses (not huge corporations, but smaller/start-up would benefit) I see their revenue going higher. That said, I think it would be more prescient to explore sale opportunities to Google or other large firms, simply because of name recognition. Google DropBox would probably destroy all the competition. I had never heard of GoogleDrive prior to today, but DropBox I used frequently in college.

Reality hits you hard, bro...

10/26/12

Google Drive basically makes dropbox obsolete - it's a functionally similar product, but results in less "friction" for the user (everyone already has a Google account).

If you really want a standalone platform, SpiderOak has better security. $4 billion is absurd for a company that does little more than cloud storage. As you highlighted, they are doing *maybe* 400m in sales - that is 10x P/S (tech bubble level valuations).

10/27/12

Not an internet banker and I'm not 100% familiar with the space, but if Dropbox is positioning themselves as enterprise software like Box.com (a stronger company, in my opinion with a better focus on security), then 7-8x forward sales is definitely possible.

Mid to upmarket on-demand (cloud) software companies are crushing it right now. See Workday, Servicenow, Eloqua, Demandware, etc. for examples. Workday is trading around 23x 2013 revenue.

Investors love subscription revenue models, in which companies can have significant visibility into forward revenue through their billings/backlog. High switching costs means sticky revenue and continued growth. Basically, when you know that 98% of your revenue from last quarter is already on the books for the next quarter, it's pretty easy to grow. When you have 80%+ gross margin, high revenue growth, and a subscription model, earnings will come through scale.

Dropbox is too consumer facing for my liking. These companies generally suck (LogMeIn is a good example of a SaaS company that has traded down because SMB and consumers are too fickle).

Not every company trades at 1x revenue, 4x EBITDA, or 15x earnings, especially not in tech.

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10/27/12

much more integrated than goog drive on many levels. if you don't think so you're not utilizing it to its full potential. there's a reason Jobs tried to buy it

10/27/12

$4 billion is a (big) short.

10/27/12

Valuations aside love the product and with my team spread over 3 offices has improved efficiency.

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10/27/12
HowardRoark:

Let me do a quick back of the napkin calculation. They have 2 million paid users who pay $120 per year. That gives them $240 million revenue. Then there is a business version that cost upwards of $800 per year. Dropbox claims that they have 2 million businesses signed up. So, their total revenues could be anywhere above $400 million ($240m + 2m*$800).

Of course, I'd love to know if you guys think the math adds up.

I do not think the maths adds up.

$240m + 2m*$800 = $1,840m, not $400m.

Your source is a spoofer.

10/27/12

Won't google drive allow its users to work on an excel/word file (using the google equivalents of course) at the same time? If so, Google will destroy dropbox. While I use DB a lot, the issues my group ran into when using it for schoolwork was that we couldn't work on the same file at the same time, and we had problems where one person saves the file, which overrode another person's upload who was working on a different portion. Obviously, a simple fix is to have everyone upload their sections and then combine it later on, but if Google allows multiple people to use a file while dropbox doesn't, then it'll definitely drag me away from Dropbox.

10/27/12
Accrual Dictator:

Won't google drive allow its users to work on an excel/word file (using the google equivalents of course) at the same time? If so, Google will destroy dropbox. While I use DB a lot, the issues my group ran into when using it for schoolwork was that we couldn't work on the same file at the same time, and we had problems where one person saves the file, which overrode another person's upload who was working on a different portion. Obviously, a simple fix is to have everyone upload their sections and then combine it later on, but if Google allows multiple people to use a file while dropbox doesn't, then it'll definitely drag me away from Dropbox.

wso team has been using google docs/drive the way you described above and i couldnt imagine it being done any other way, VERY helpful to both working on same file at same time

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10/27/12
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