Dropbox IPO At $21 Is Priced Higher Than Expected, Thanks To High Demand

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Dropbox has decided the price of its Initial Public Offering (IPO) is at $21 per share. The company was earlier estimating the IPO range to be somewhere between $18 per share and $20 per share, higher from the previously estimated range of $16 per and $18 per share.

“Pricing above the revised range indicates there is more demand than supply for growth technology IPOs especially those generating substantial positive free cash flow,” said Leslie Pfrang of Class V Group, an IPO advisory firm, according to Reuters.

Dropbox IPO will debut on Friday, and the company is selling 36 million shares. A source told CNBC that the offering was oversubscribed by 25 times. Dropbox would trade under the ticker “DBX.” Dropbox IPO is one of the largest tech IPOs since Snap last year, giving the company an initial market capitalization of over $8.2 billion, below the $10 billion valuation it got in a 2014 funding round.

Andrew Houston, co-founder and Chief Executive Officer, will sell 2.3 million shares in the offering, but will still own 24% of the company. Dropbox IPO price of $21 per share marks a big success for its largest investor – Sequoia Capital. The venture capital firm owns 25% of the company before the IPO.

Sequoia led the company’s first two new financing rounds, out of a total of only four. It means the firm has less competition from the new investors, who would dilute its ownership stake, notes Recode. Sequoia also bought shares of the company at a lower price compared to the later lead investors.

Cloud storage is one of the most essential services for the consumers in the data era. Physical hard drives are a good alternative, but there are always chances of them crashing. So, customers are left with just one option – i.e., cloud storage. Big cloud companies save files in multiple servers to make sure the data is safe.

Dropbox certainly wants to make it big on Wall Street and in the segment, but it faces big competition from behemoths like Google and Amazon. Among the big five, Dropbox has the most stringent terms, a drawback for the company against the likes of Microsoft, Apple, Amazon and Google.  Other firms like Backblaze and Carbonite also offer online storage for lower fees, notes USAToday.

“For me the biggest problem I have with Dropbox is they don’t have any unique competitive advantages or proprietary offerings that differentiate them from the pack,” said Adam Sarhan of the investment advisory service 50 Park Investments, according to Reuters.

Rivals such as Google and Apple claim a wide base, but do not reveal the paying customers. Google claims that it has 800 million users, whereas Apple says that it has 782 million users of iCloud. Others like Microsoft and Amazon have not come up with numbers.

The cloud storage company posted over $1 billion revenue in 2017, and has a user base of 500 million. The company did post a net loss of $111.7 million in 2017, compared to $210 million a year earlier. According to USA Today, the company has only 11 million paying subscribers, while the majority of its userbase is of users with free 2 GB accounts.

Back in 2016, Dropbox announced that its free cash flow had turned positive indicating a strong financial position. The positive cash flow was made up with the help of some financial engineering that allowed an overestimation of the cash flow. Breakup of the details revealed that the free cash flow would have remained negative had the company resorted to a more conservative accounting method, notes a separate report from CNBC. The cloud storage company did not include principal payments for its capital leases in the free cash flow statement.

Had Dropbox included $139.5 million in capital and financing lease payments in 2016, it would have recorded a negative $2.1 million in free cash flow against the $137.4 million positive free cash flow disclosed. In 2017, the correct free cash flow would have been at $169.7 million, half of the $305 million disclosed in the filing.

Nevertheless, the fact is, Dropbox IPO is finally a reality. The company has sparked interest among investors and is standing firm against the rivals. The offering is expected to end on March 27 subject to customary closing conditions. The next big tech IPO will be streaming music leader Spotify, which will list its shares on the NYSE on April 3.

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