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Dropbox’s Success Could Trigger a Wave of Tech IPOs

Written by Monica Savaglia
Posted March 27, 2018

The tech industry was enlightened on Friday, March 23rd, when Dropbox (NASDAQ: DBX) made its public market debut.

A few weeks ago, I gave Wealth Daily subscribers some brief preliminary details about Dropbox’s initial public offering (IPO). I had a feeling this IPO was going to be something to talk about, which is why I had to share it with readers.

It’s been awhile since the tech industry has seen a highly valued tech company go public. Last year investors were excited about Snapchat’s IPO but later disappointed with the company and its share price, which has been consistently trading below its IPO price.

Dropbox was planning to set an IPO price in the range of $16–$18, but the night before it IPO’d, it increased that price to $21.

It was a clear sign that the company was feeling optimistic and confident about its big day. Shares opened for trading at $29.

All of this happened at a time when the market had been extremely volatile. All of the major U.S. indices were falling more than 2.5%, but that didn't affect Dropbox.

The U.S. tech market is unique, with an ecosystem that gives tech companies the opportunity for some substantial and strong growth.

So far, we’ve seen a strong start for the year. The success of Dropbox’s IPO could be the push that other unicorn companies aiming to go public need.

In case you weren’t aware, a unicorn is a startup company that’s valued over $1 billion.

Dropbox’s success has let other unicorn companies know that they, too, have the opportunity to thrive in the stock market.

How Dropbox Plans to Thrive

Dropbox has a partnership with Salesforce. That partnership has helped grow Dropbox’s business plan even stronger.

Quentin Clark, SVP of Engineering, Product and Design at Dropbox, said:

This deeper partnership with Salesforce is a great opportunity to build new value for our mutual customers. We’re looking forward to delivering these new integrations so our customers can get the most of their tools.

The partnership Dropbox has with Salesforce will help it succeed on the public market, in addition to helping it maintain and build its valuation.

Dennis Woodside, chief operating officer at Dropbox, said this about the partnership with Salesforce:

Salesforce has completely changed the way businesses connect with their customers through the use of cloud, social, mobile IoT and AI technologies. Together, we have the opportunity to fundamentally change how people work.

Not to mention that cloud platforms are expanding and expected to grow even further throughout the next decade.

Gartner's latest worldwide public cloud services revenue forecast has Software-as-a-Service (SaaS) revenue predicted to grow from $58 billion in 2017 to $99 billion in 2020.

SaaS is forecast to outpace the total cloud market. Dropbox’s cloud platform is a SaaS model, which means it will be part of the market that's in the lead.

An IPO to Emulate

Dropbox closed its first day of trading at $28.48 per share — a modest but stable increase from the $21 IPO price. 

Shares didn’t jump because of hype. It was instead based on valuation. This is an encouraging sign for investors who are looking to keep Dropbox in their portfolio for the long haul.

Dropbox’s success could trigger a wave of tech IPOs this year.

Yogesh Amle, head of software at Union Square Advisors, said:

The tremendous success of the Dropbox IPO shows that the pent-up demand for good quality IPOs and the roster for technology IPOs looks very strong this year. It demonstrates that good quality unicorns can still fill into large valuations

Dropbox’s IPO success couldn’t come at better time, especially when it comes to music sharing company Spotify. The company has filed for a direct listing on the New York Stock Exchange on April 3, 2018.

Spotify is another company with a lot of anticipation behind it.

Dropbox’s Influence on Spotify’s Direct Listing

Dropbox’s IPO has definitely laid some groundwork for Spotify. Dropbox's IPO success could help turn Spotify's direct listing into a success story of its own.

Spotify is valued at about $19 billion in the private market. It plans to sell up to 55.7 million ordinary shares.

Its direct listing is going to let investors and employees sell their own shares.

There are some obvious benefits to a direct listing:

  • No banks involved that the company has to pay
  • No road show, which helps lessen the unrealistic hype
  • No fees
  • No lock-up period

Spotify is the first highly valued and highly profiled company to have a direct listing. The company doesn’t need to raise capital from its market debut.

It doesn’t need a road show because it’s a globally known company that has been around for 12 years.

A direct listing will save Spotify money. It will also save it from attracting investors who are looking to benefit from the hype.

The company is looking forward to a strong eight months — or at least it’s hoping to be...

It has forecast a 36% increase in paid subscribers. Last year it had 71 million subscribers. For 2018, it's aiming for 96 million.

It’s also working towards increasing its revenue by 30% while shrinking its operating losses to $409 million.

These could very well be realistic goals for Spotify, but a few things stand in the way. A huge roadblock for Spotify is that it competes with Apple Music. 

On one hand, Spotify’s user base is double that of Apple Music. On the other hand, Spotify has been having a hard time monetizing its customer base.

Getting subscribers to switch to its premium service is crucial to Spotify. Premium users are essential to Spotify’s revenue.

They make up roughly 45% of its user base, but they made up 90% of the company’s revenues in fiscal 2016 and 2017.

If it's unable to grow its premium base and give users the incentive to switch to its paid service, then that will become a huge problem for Spotify. But of course, only time will tell. 

Make sure you keep an eye out for Spotify’s direct listing next Tuesday, April 3rd!

Dropbox’s IPO and Spotify’s direct listing will pave an interesting road for 2018 IPOs. We could very well start to see more unicorns braving the storm.

Until next time,

Monica Savaglia Signature Park Avenue Digest

Monica Savaglia

Monica Savaglia is Wealth Daily’s IPO specialist. With passion and knowledge, she wants to open up the world of IPOs and their long-term potential to everyday investors. She does this through her newsletter IPO Authority, a one-stop resource for everything IPO. She also contributes regularly to the Wealth Daily e-letter. To learn more about Monica, click here.

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