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Editor's Note: Since Keith originally wrote this column, Dropbox raised its IPO price range to $18-$20 per share, suggesting a valuation of up to $7.85 billion. That makes what he has to say about the cloud storage company's over-hyped IPO even more important. Here's Keith…
Dropbox will "price" its initial public offering – IPO for short – on Thursday and begin trading Friday if all goes according to plan. Reports are that the offering is "oversubscribed" – a Wall Street-speak term meaning that they're hard to get – and that there's a lot of "demand" for shares.
So why is it you shouldn't touch 'em with a ten-foot pole?
Because Dropbox is going to be another company in a long line of "oversubscribed," "in-demand" public offerings that isn't worth the paper its stock certificates are printed on.
Yet.
Newly minted tech companies are a dime a dozen. As such, they have no place in an investor's portfolio until after they've proven themselves with a quarter or two of numbers as a public company.
The numbers look impressive at first glance.
Analysts will waste no time telling you, for example, that the worldwide cloud industry is expanding at 21.9% a year and will be worth a staggering $227 billion by 2021, according to the IDC. Just keep in mind that's no different than the breathless hype from an old-fashioned boardwalk carney hawker 120 years ago trying to lure you into a tent to see the "Lizard Man" or some other oddity.
Dropbox is selling 36 million shares with an option to increase that by another 5.4 million if underwriters like The Goldman Sachs Group Inc. (NYSE: GS) and JPMorgan Chase & Co. (NYSE: JPM) exercise their rights to buy more as the stock takes off. Initial prices are now expected in the $16 to $18 range, which suggests a valuation of up to $7 billion. That, too, sounds great because it would make the Dropbox IPO the biggest since Snap Inc. (NYSE: SNAP) debuted roughly a year ago.
What they're not telling you, though, is very "telling."
The projected $7 billion is $3 billion lower than a 2014 funding round reportedly valuing the company at $10 billion. Ergo, the company is already worth less than insiders thought it was a few years ago. With four years behind them, the number should be going the other way… as in higher.
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Then there's the fact that Dropbox's growth is slowing. Revenues jumped 40% from 2015 to 2016 but only 31% from 2016 to 2017. I think this year the company will come in at 25%, perhaps less, because the vast majority of its roughly 500+ million users don't pay for the service, yet still enjoy benefits.
The company would have to turn in at least 20%+, consistently, year over year to be worth the "risk" in my book, and there's not a snowball's chance in you know where that's gonna happen!
Why people think companies like Dropbox are so special is beyond me.
The company is one of dozens of outfits offering collaborative applications – a fancy Silicon Valley term meaning stuff that lets you work with others. Besides, Alphabet Inc. (Nasdaq: GOOGL), Apple Inc. (Nasdaq: AAPL), Amazon.com Inc. (Nasdaq: AMZN), and Microsoft Corp. (Nasdaq: MSFT) all have similar products, not to mention far deeper pockets and, not coincidentally, real businesses kicking off billions of dollars in real revenue.
I'm also deeply suspicious of how the company's shares are structured. Here's why…
About the Author
Keith Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He's a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs High Velocity Profits, which aims to get in, target gains, and get out clean, and he's also the founding editor of Straight Line Profits, a service devoted to revealing the "dark side" of Wall Street... In his weekly Total Wealth, Keith has broken down his 30-plus years of success into three parts: Trends, Risk Assessment, and Tactics – meaning the exact techniques for making money. Sign up is free at totalwealthresearch.com.
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