Why Dropbox's IPO is a software winner on Wall Street

Dubai - Company's private market value is a nosebleed $10B making CEO Drew Houston a classic Abu Unicorn

I read about Dropbox's confidential SEC filing with utter fascination. This will be the cloud infrastructure IPO of mid 2018 in Silicon Valley that much, at least is certain. Dropbox is a global file sharing/storage brand name, with $1 billion in revenue run rate, near Ebitda profitability and positioned in the enterprise sweet spot that commands such a premium on the Nasdaq. I was surprised to see JPMorgan and not Morgan Stanley as co-lead underwriter with (who else?), Goldman Sachs on the deal.
The Dropbox IPO will not be cheap. I hear the company's private market value is a nosebleed $10 billion making Drew Houston a classic Abu Unicorn. Yet I hear Street wants a pre-IPO at $7 billion market cap, JPMorgan raised a $600 million syndicated loan for Dropbox, which alerted me that a major 2018 IPO was imminent. Unlike my thumbs-down on the unprofitable, iffy consumer business model. Snap, I will go Radio Gaga for the Dropbox IPO. After all, First Data listed at $14 billion three years ago.
Unlike Spotify, Dropbox will be a book-building IPO and will be priced to appeal to institutional investors, not go go Bitcoin gamble jockeys. The business metrics are fabulous - 617 million users in 2017, 200,000 file sharing/storage clients in its cloud service platform. Dropbox has made corporate custom-built server farms to store/share documents. True, Dropbox will face cutthroat competition from Microsoft and Google, not to mention close rivals like Box. (which went public eight times revenues in 2015).
Yet Dropbox has built its own private cloud data center, a huge cost advantage. I am also reassured that Bank of America, Deutsche Bank, Royal Bank of Canada and Macquarie Bank joined the JPMorgan loan syndicate for Dropbox. Hugely complex, global businesses like the Nasdaq, Boots and HPE lead its corporate clients while content collaboration usage has gone viral. This cash flow positive cloud software service puppy's IPO will rain money for a few lucky investors - and I fully aim to be one of them.
I am alarmed by the consensus belief among investor friends in the GCC that Silicon Valley "unicorns" are worth owning at any price in the private market. True, we believe in IPO "name investing" in the Gulf or at least we did until a succession of brand name IPO's like Emaar Malls, Emaar Development and Dubai Parks and Resorts tanked below their IPO offer price. Unicorns are no different. Snap was a wildly successful unicorn but the post IPO performance has been a disaster, as I had guesstimated in a column last year since Facebook is just not an archrival any new business can vanquish. Blue Apron is down 60 per cent from its offer price.
Softbank slashed 30 per cent from Uber's stratospheric valuation with its latest financing round that settles the company's post-Travis future. With the Nasdaq at historic highs and the S&P 500 index at 23 times trailing earnings amid a global trade war, a dollar free fall and a spike in US Treasury bond yields, I can easily evoke memories of the tech bubble peak in 1999-2000 or, ghastlier still, Black Monday October 1987. So will I be an aggressive buyer of Spotify's direct listing IPO when (if?) it happens in March. No. Yet if the market cap falls to $12-$13 billion or three times revenue, the music streaming firm will be worth nibble.
Other IPO's that interest me are ride hailing app Lyft and social network Pinterest and online rental broker Airbnb and container software firm Docker. This is one of the iconic enterprise cloud infrastructure companies, even though I believe that there is now a valuation bubble in both the private and public markets. If I were an early stage financier/venture capitalist, I would watch the IPO pipeline for 2018-19 with a dollop of cynicism. As Charles Ryder reminisced when his battalion passed the haunted silk road of Brideshead, I have been here before!
The Valley grapevine contends 240 companies have a private market value of $1 billion (what could possibly go wrong?) - and I thought unicorns were rare beasts! Late stage funds in Wall Street, Europe and Asia have gone ballistics led by the $100 billion Vision (so many visions, so few ophthalmologists!) Fund. A tsunami of liquidity has literally swamped the Bay Area, Palo Alto, San Jose and Cupertino. Its raining moolah. Santayana was so right. Those who refuse to learn the lessons of history are doomed to repeat them.
The writer is a global equities strategist and fund manager. He can be contacted at mateinkhalid09@gmail.com.