Dropbox surge paves way for Spotify to shine
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.
From time to time, StoneX Financial Pty Ltd (“we”, “our”) website may contain links to other sites and/or resources provided by third parties. These links and/or resources are provided for your information only and we have no control over the contents of those materials, and in no way endorse their content. Any analysis, opinion, commentary or research-based material on our website is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. No representation or warranty is made, express or implied, that the materials on our website are complete or accurate. We are not under any obligation to update any such material.
As such, we (and/or our associated companies) will not be responsible or liable for any loss or damage incurred by you or any third party arising out of, or in connection with, any use of the information on our website (other than with regards to any duty or liability that we are unable to limit or exclude by law or under the applicable regulatory system) and any such liability is hereby expressly disclaimed.
City Index is a trading name of StoneX Financial Pty Ltd.
The material provided herein is general in nature and does not take into account your objectives, financial situation or needs.
While every care has been taken in preparing this material, we do not provide any representation or warranty (express or implied) with respect to its completeness or accuracy. This is not an invitation or an offer to invest nor is it a recommendation to buy or sell investments.
StoneX recommends you to seek independent financial and legal advice before making any financial investment decision. Trading CFDs and FX on margin carries a higher level of risk, and may not be suitable for all investors. The possibility exists that you could lose more than your initial investment further CFD investors do not own or have any rights to the underlying assets.
It is important you consider our Financial Services Guide and Product Disclosure Statement (PDS) available at www.cityindex.com/en-au/terms-and-policies/, before deciding to acquire or hold our products. As a part of our market risk management, we may take the opposite side of your trade. Our Target Market Determination (TMD) is also available at www.cityindex.com/en-au/terms-and-policies/.
StoneX Financial Pty Ltd, Suite 28.01, 264 George Street, Sydney, NSW 2000 (ACN 141 774 727, AFSL 345646) is the CFD issuer and our products are traded off exchange.
© City Index 2024