Dropbox surge paves way for Spotify to shine

Blue avatar for FOREX.com guest contributors
By :  ,  Financial Analyst

Dropbox surge paves way for Spotify to shine

Spotify next

Dropbox’s decision to brave this week’s market turbulence has paid off. The group was rewarded with an opening ‘pop’ of as much as 50% on Friday. The shares surged past their $21 IPO pricing to settle around $29 at last check. The jump was all the more remarkable given the negative overall market backdrop, where the Nasdaq index, the stock’s new home, continued this week’s pattern of handing back intraday gains to fall sharply. Dropbox’s market entry bodes well for the other closely eyed IPO scheduled in coming weeks, Spotify’s. In some ways, Dropbox provided a dry run and a test of sentiment for the larger firm, which expects to reach a valuation higher than $20bn, more than double that of Dropbox, even after its huge rise. Omens are also good for Spotify given that DBX was oversubscribed several times, pushing the bidding between institutions well above an $18-$20 a share indicative range.

Snap factor

With the memory of Snap’s spectacular market debut in mind though, investors will be watchful of whether Dropbox shows a similar pattern of backsliding following early success. Whilst DBX and SNAP are in totally different businesses, neither makes money and both are also-rans competing against rivals large and small.

Cash flow positive

Still, Dropbox is a well-run business. Revenue of $1.11bn in 2017 was higher than the $884.8m it made the year before, and it halved its loss to around $100m. Investors also had an eye to the $300m in free cash flow CEO and co-founder Drew Houston managed to stash – up by more than 100% – despite losses. There were other signs of sober management too. The IPO was helped by a steep discount relative to Dropbox’s last private funding round, down about 30%. That partly reflected slipping sales growth. Whilst still up a solid 31% in 2017, sales had risen 40% in 2016. Furthermore, the group was obliged to disclose that it expected expenses to increase in the near term. Some of that rising expenditure will provide the investment required to monetize Dropbox’s user base of some 500 million, with the aim of ramping paying subscribers from the current paltry level of 11 million.

Partnership risk

Smartly, Dropbox has struck partnerships with giants Google, Amazon and Microsoft, helping alleviate key concerns around competition, at least for now. What’s absent from its public models though is an assessment of valuation impact if large partners were to bring services offered via Dropbox in-house. Apparent low concern about this risk amongst investors suggests some of Friday’s hype is potential takeover hype. Either way, the group has listed with the beginnings of a sound business model, rather than a proven one, and by contrast, some of its risks are well-defined.

Related tags: Shares market

Open an account today

Experience award-winning platforms with fast and secure execution.

Web Trader platform

Our sophisticated web-based platform is packed with features.
Economic Calendar