Dropbox needs to find a new 'ethos' and more business customers for an IPO home run
- Dropbox is aiming to have its IPO in the first half of 2018, according to reports.
- Analysts aren't at all surprised, but have a few things at front of mind when it comes to anticipating how Dropbox will do as a public company.
- The market for collaboration tools is huge, analysts say, but Dropbox needs to focus in on appealing to enterprise customers.
Dropbox has earned a consumer-friendly reputation by making it easy for non-techies to store family photos, school homework and other digital knick-knacks on the popular online service it launched ten years ago.
But as the company prepares sell shares to the public in an IPO, it will need to button-up its image and win the favor, and the budgets, of picky business customers, according to analysts who follow the company.
"The simple function of storing content is pretty well commoditized now and most of the people who are going to use that function are already using it," said Terry Frazier, a research director at industry research firm IDC.
The big growth for Dropbox, he says, will come by providing "increased functionality capabilities for business and enterprise customers."
Dropbox secretly filed the paperwork for an IPO, according to a Bloomberg report on Thursday.
The IPO has long been rumored to be in the works, and given Dropbox's last reported private market valuation of $10 billion, it's expected to be one of the biggest public offerings in tech this year.
Many of the details, including the size and valuation of Dropbox's planned IPO, are still unknown. The lens through which Wall Street will assess this big tech IPO is not ideal, however: Snap's much-hyped 2017 IPO has proven disappointing, with the stock now trading below its offering price.
And Dropbox's closest parallel in the public markets, Box, has faced a rocky ride on Wall Street. The stock soared 70% the day of its IPO in January 2015, then plunged to its IPO price and has only recently returned to the level it reached on its first day of trading.
Dropbox is cash-flow positive, and it has room to grow
The so-called content collaboration market grew by 40% in 2017, and Gartner forecasts that it will continue to grow by double-digit percentage points through at least 2021.
This means that there's more than enough room for both Dropbox and its competitors at Box, Google, and Microsoft, according to Karen Hobert, an analyst with Gartner.
"It's not a fight to the death," Hobert said. "We've seen significant growth and we anticipate significant growth in this market."
For 2018, Gartner forecasts 34% growth in the space, with steady declines on an annual basis. Over time, Hobert said, that growth could stabilize around 8% to 12% annually.
As a private company, Dropbox's financials results are still under wraps, but the company said in January 2017 that it was on track to generate $1 billion in revenue on an annualized run rate. CEO Drew Houston said in June 2016 that Dropbox was "cash flow positive," an important gauge of financial health followed by Wall Street.
This is good news for any company, but especially one with potential traders looking for signs that Dropbox stock will see returns in the long-run.
It's a success with consumers, but Dropbox needs to focus on businesses
Dropbox has two core products: a freemium consumer file sharing service, with paid upgrades; and an enterprise-grade storage and collaboration platform. The company has around 500 million customers, but it's unclear how many of those are individuals, and how many use it for work.
Though Dropbox has a strong reputation in the consumer space, analysts said that it will need to focus more on its business clients if it wants to grow its market share.
IDC analyst Frazier said that while Dropbox has been less focused on its business product than rival Box has been, there is "certainly potential" for them to succeed with those customers.
One big advantage is Dropbox's approach to security and infrastructure. Most of Dropbox's services run on services owned and operated by the company, rather than third-party cloud storage providers like Amazon Web Services or Microsoft Azure.
"I'm really impressed with the approach to security that Dropbox takes - because they run their own infrastructure, they have their arms around everything," Frazier said. "If I were an enterprise buyer, I would be looking at that really closely at that as a potential competitive advantage."
Dropbox could struggle to keep its 'creative' brand once public
Hobert thinks this positioning has worked for the company so far, but that it might pose a challenge to Dropbox once the company is facing constraints as a public company.
"Dropbox has always impressed me as a company that has a strong personal ethos around creativity and doing things the way they'd like to. Being private, they've benefited because they've been able to be innovative," Hobert said.
"Once they go public, they might have other pressures that hinder that ethos, that might put more imperative on delivering certain capabilities. There will be a little bit of a sobering up because they no longer can be autonomous," she said.