Dropbox is awesome and is worth $4b+ valuation.
A company is valued on 6 main things:
- Past performance
- Financial health
- Growth potential
- Team
- Exit Options
- Moat/Entry barriers/stickiness - how a company protects its terrain.
Past Performance: 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 200k businesses signed up. So, their total revenues could be anywhere above $400 million ($240m + 200k*$800) . That's awesome for a 4 year old company.
Financial Health: Let us assume their net margins are 33% and that could give a net profit of $133 million and a 4 Billion valuation means a 30 P/E (defined as: total value of the company/net profits). Not too bad, given that average PE for publicly traded companies is about 22 and for many pre-IPO companies the ratio is in the triple digits. They also have less than 150 employees (only a third are engineers) and that gives the revenue/employee at above $2 million. This means they are efficient and better at scaling. That is good.
Growth potential:
- Cloud computing industry is red hot and the segment that Dropbox is in has 50%+ annual growth rates.
- There are network effects at play here, given that a lot of people use Dropbox to share files among their friends. The network effects could hit a tipping point soon.
- Facebook groups has now announced a Dropbox integration in it. I'm sure we will see more of these in the months to come.
- Given that 96% are yet to pay, but still finding use, you could have a large upside when many of those who hit the ceiling at 2 GB are forced to move to the paid version.
- Businesses seem an even more lucrative segment, and Dropbox has its foot there.
Team:
Dropbox has a great team, and the founders seem to go together well. They have attracted a lot of smart engineers, and no major controversy has come out. The founders are still running the company even after this scorching growth and that is a big positive.
Exit Options:
Dropbox is in an industry where the tech triumverate - Microsoft, Google, and Apple are committed in. Skydrive, GDrive, and iCloud will intensify their competition in the coming years as cloud vs. PC battle will define the industry. All these biggies also have huge amount of cash to throw about. That means one of them could buy out Dropbox for a hefty price.
Stickiness:
- Dropbox is one of the most well integrated cloud storage applications. It works on all major Operating Systems and works with most project management tools and third party applications.
- There are network effects already visible given that many teams and individuals are using the tools for sharing and collaboration.
- The company has enough scale that it could use the "learning curve" to its advantage.
- It is perceived as glitch-free, and people have already taken it as a part of their workflow.
Threats:
- Dropbox is in a very competitive industry, and there could be a huge price war.
- The major competitors of Dropbox - Microsoft, Google, & Apple have their own platforms that they could use to integrate their cloud offerings well. This could put Dropbox at a disadvantage.
- There is still a potential security risk. If a couple of major server "break-ins" happen and a few users lose their critical files, there could be a huge drop in usage.
On the whole, Dropbox is a great company. It is a fast growing industry, a healthy company, and large userbase. I don't think it is overvalued.
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