Dropbox IPO Could Be Its Swan Song

• Dropbox is rumored to go public in 2017.
• Intense competition, a commoditization process, and a lack of acquisition appeal have put Dropbox in a problematic place.
• Its IPO will be Dropbox’s last ditch fight, which we believe is doomed to fail.

For a long time, the cloud storage provider Dropbox was a hot name in the private startups market and the elite unicorns club after it raised a whopping amount of more than $600M in five funding rounds between 2007 and 2014. Dropbox was a pioneer in the cloud storage market when it made unlimited online storage accessible for consumers at reasonable prices across many devices, eco-systems, and operating systems. Dropbox engaged in a significant number of partnerships that enabled it to expand its offering significantly. Thus, many applications support Dropbox file sharing alongside the company’s standalone products.

For a while, Dropbox was a synonym for online cloud storage services and, according to various estimations, controlled the majority of the market share. Dropbox’s success proved the potential of the cloud storage market that had remained mostly untapped before it attracted tech giants such as Apple (NSDQ:AAPL), Microsoft (NSDQ:MSFT) and Alphabet Inc-C (NSDQ:GOOG) to gradually broaden their offering in that market. For the tech giants, cloud storage was another service to offer to customers that were currently using their eco-systems iOS/Android/Windows across different devices. Each company tried to offer the broadest ecosystem not only to keep its customers within the eco-system but also to lure new customers to expand business and sales.

Today, we witness this in e-payment services like Apple Pay, Android Pay, and Samsung Pay; music streaming services like Apple Music and Google’s Play; productivity tools like Apple’s iWork, Google Docs, and Microsoft Office, and the list goes on. Cloud storage was one of these features, and all the big tech companies had attractive plans for online storage of dozens of gigabytes and terabytes, an unlimited storage capacity. The large players such as Apple, Google, Microsoft, and Amazon gleaned thin margins and little revenues from the cloud storage initiative but embedded it deeply into their eco-system, becoming inseparable.

The cloud storage market has evolved into a six-player market with Microsoft, Apple, Google, and Amazon, each trying to enhance and support their eco-systems with these services, and two eco-system-agnostic companies Box, Inc. (NYSE:BOX) and Dropbox. In the last couple of years, the market became more and more competitive when the four tech giants not only expanded their offering but also slashed prices, as Apple did last year. At the same time, Box was in the midst of a fundamental business change to focus more on business clients, efficiency, and productivity enhancement tools rather than simple storage space.

The significant shifts in the cloud storage market left Dropbox as the only pure-play cloud storage provider that is eco-system agnostic. While that might have been an attractive place to be a few years ago, today when consumers can use an embedded and native service like iCloud, Google Drive, Microsoft OneDrive, or Amazon Cloud Drive—which work easily and seamlessly across devices and are fundamentally integrated into every part of the eco-system for a small price that goes as low as $0.99 for 50GB in iCloud—the advantages of Dropbox become vague.

Dropbox is currently in a very problematic place. The cloud storage market is going through a commoditization process, which is led by the biggest tech companies in the world. On the other hand, as the technology advances, the barriers to entry slowly disappear and in case a tech giant like Alibaba (NYSE:BABA)—for example—would like to offer cloud storage services in the U.S., it could easily execute it, and it could be fairly competitive in terms of performance and price. So on top of the commoditization process, Dropbox’s appeal as an acquisition target for a larger company is also low.

The problematic status of Dropbox is reflected in the decline in its stock price in the private market as reflected by a valuation made by mutual funds that invested in the company. Since the last equity funding round, Dropbox share price dropped from $19 in Q1 2014 to an average price of $10.16 in Q2 2016 which reflects a huge decline of 46% in valuation and highlights the market’s gloomy view of Dropbox.

In its current state, Dropbox will find it very hard to raise another round of funding in the private market and as investors believe the company is overvalued it will be very difficult to inject new money into the company like in the past. As Dropbox is not an attractive acquisition target, the last step it can take to stay above the water is to go public and offer existing shareholders an exit while raising money from the public market. As I described above, I am not very optimistic about Dropbox’s place in the cloud storage market and going public under tremendous pressure will have a negative impact on the company.

Early investors of Dropbox probably have some ratchet mechanism that will not only protect their investment value but also offer them a minimum return on their investment. Other investors will probably purchase Dropbox shares at a significant discount that will bring some fresh money into the company but will drive down valuation and will add a lot of noise and distraction to the enterprise. In my opinion, investors should stay away from Dropbox IPO unless it provides some opportunity they can’t refuse, and I doubt if that will be the case. It seems that an IPO will be the swan song for Dropbox that will be the beginning of the end of the former glorious cloud storage vendor.