Dropbox outshines in Level 1; But Level 2 is tougher

After two weeks of blunders and scams – thanks to Facebook (FB) and Uber – the tech space ended Friday’s trade on a spark. In one of the biggest IPOs of the year, Dropbox (DBX) started trading on the Nasdaq for an opening value of $21 per share, higher than the predicted range of $15 to $20. Investors rushed in to secure shares of the tech sector’s latest darling, sending its stock price almost 36% up on the opening day.  When the day ended, the cloud storage company was trading at $28.48 per share, with a total valuation of about $12 billion.

The first level of the trading game was accomplished like a pro! But now comes the more difficult part of maintaining the trust of investors. Remember what happened to Snap (SNAP)?

The primary challenge would be fending off competition from giants such as Microsoft (MSFT) and Google (GOOGL), something the company has been doing pretty effortlessly so far. But the cloud space is getting congested and cheaper, which would force the company to diversify and innovate more to stay in business. Last year, the company had successfully launched Dropbox Paper, in competition with Google Docs.

Another challenge in front of Dropbox is turning profitable. The company had earlier stated that its revenue grew to $1.11 billion in 2017 from $844.8 million a year ago, while net loss almost halved to $111 million. Only about 30% of the cloud-based firm’s users are business accounts. So, unlike earlier when the company depended heavily on word-of-the-mouth publicity, Dropbox will now be forced to spend more on marketing to drive revenue in the coming years.

Driving user base could become a problem as the Facebook debacle may lead to tighter regulations on applications that use user data.

A ‘snapping’ risk awaits

Dropbox has sold only 9% of its total shares on the opening day, much lower than the median float of 33% to drive demand and boost the price. The lockup period will end in the next six months, by when the company will have to float the entire remaining shares. There is a chance that this flooding would lead to a price crash, something that happened to Snap after a successful IPO last year.

Only about 30% of the cloud-based firm’s users are business accounts

Also, by this time, Dropbox would have reported two rounds of quarterly revenues, and a lot would depend on the company’s performance. To make things more difficult, Dropbox follows a method where revenue from the subscription is calculated in the long term. Therefore, a revenue hike will remain modest even if the company manages to add a few new subscribers. A loss-making company with stagnant revenue may not impress many investors.

Anyways, for a start, Dropbox has done well. It has also set a bright stage for the next big IPO of 2018 – Spotify, which is happening next week.