Drew Houston, chief executive officer and co-founder of Dropbox Inc., right, and Arash Ferdowsi, co-founder of Dropbox Inc., stand for a photograph outside the Nasdaq MarketSite (Photographer: Victor J. Blue/Bloomberg)

Dropbox IPO: Investors Value Company as Something It's Not

(Bloomberg Gadfly) -- Investors have gone gaga over Dropbox Inc. in its first few hours as a public company. It looks as if their enthusiasm has become overheated. 

Shares of Dropbox, the digital file-cabinet company, shot up about 39 percent on Friday from their initial sale price. That gives Dropbox a valuation of about $13 billion, including the value of shares held by employees and others. Dropbox's multiple of revenue now stands at about 12 based on 2017 revenue, which is on the high end for companies that sell subscription software to businesses.

Dropbox IPO: Investors Value Company as Something It's Not

As I have written previously, the vast majority of Dropbox's paying customers are individuals who sign up on their own. The majority of customers for other subscription software firms such as Workday Inc., Salesforce.com Inc. and similarly named Box Inc. are companies. That made it unclear whether investors would choose to value Dropbox in that familiar category.

At least on Dropbox's first day as a public company, the wisdom of the market crowd is that Dropbox is a business-software company despite its difference. And investors have decided Dropbox deserves to be valued on the high side of subscription software firms. Dropbox's price-to-sales ratio is about double that of Box, higher than that of Salesforce and in the territory of Workday, which tends to have a rich valuation in its category. 

Yes, Dropbox is growing quickly, generates impressive cash flow and spends far less than a typical subscription software company to find and lure new paying customers. For now, stock market investors have decided those characteristics deserve a rich premium to most of Dropbox's peers -- or quasi-peers.

Dropbox's success on Day One should give hope to other young tech companies that don't neatly fit with software companies that came before. SurveyMonkey, DocuSign, Slack and Evernote are other firms that sell software by subscription and rely to varying degrees on the Dropbox-like approach of appealing to individual users rather than pitching their software to the corporate bosses that spend trillions of dollars a year on workplace technology. 

Only time will tell whether investors' first day enthusiasm about Dropbox will last. The company may actually be worth more than a typical business-software firm that must spend lavishly to land picky corporate technology buyers. But Dropbox stock buyers are putting a lot of faith in a company that has a relatively novel business model and economic characteristics and that struggled until relatively recently to hit its financial stride. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Shira Ovide is a Bloomberg Gadfly columnist covering technology. She previously was a reporter for the Wall Street Journal.

To contact the author of this story: Shira Ovide in New York at sovide@bloomberg.net.

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