Why the Dropbox and Box IPOs Should Be Avoided

Dropbox and Box, two rival cloud storage companies, are both likely to go public sometime this year. But with intense competition from Microsoft and Google, along with Google's recent price cuts, Dropbox and Box have a very difficult road ahead.

Mar 18, 2014 at 7:00PM

This article was updated on April 8, 2015

With cloud storage company Box (NYSE: BOX) finally going public earlier this year, Dropbox remains the last major cloud storage provider to take the plunge. Dropbox has amassed more than 300 million users, mostly consumers, while Box is focused on the enterprise segment, claiming more than 34 million users at 280,000 organizations. But with the cloud storage market heating up, and with companies like Google (NASDAQ: GOOG) and Microsoft (NASDAQ: MSFT) all vying for a piece of the pie, do Dropbox and Box stand a chance? Or will their IPOs create more bag-holders than anything else?

The big problem
A cloud storage service offers a convenient way to to access files from anywhere, on any device, by storing data in the cloud. All of the various services offered do essentially the same thing, making it difficult for companies like Dropbox and Box to differentiate themselves from the competition. Free storage and price are two ways, but after various price drops, the picture doesn't look pretty for the upstarts.

ServiceMonthly priceStorageIncluded perks
Google Drive $9.99 1 TB N/A
Google Apps for Work $10 Unlimited Google Apps
Microsoft OneDrive $6.99 1TB, soon to be unlimited Microsoft Office 365 personal
Microsoft Office 365 Business $8.25 1TB, soon to be unlimited Microsoft Office 365
Amazon Cloud Drive $5 Unlimited N/A
Dropbox $9.99 1TB N/A
Dropbox for Business $15 Unlimited N/A
Box Business $15 Unlimited N/A

Source: Google, Microsoft, Amazon, Dropbox, Box

The problem for Dropbox and Box is that Google and Microsoft probably aren't trying to turn a profit directly from their respective cloud storage services. Google's productivity apps are integrated into Google Drive, and Gmail and Google+ both use the same pool of storage. The goal for Google is likely to boost the number of people using its services, and offering a lot of free storage and dirt cheap additional storage is a good way to do that. Cloud storage is a commodity, and additional services on top of that cloud storage is the differentiator.

Microsoft seems to have the same general idea as Google. OneDrive is integrated directly into the Windows 8 file system and Office 365, and for less than either Box or Dropbox is charging Microsoft offers both cloud storage and a subscription to Office 365. For Windows users, OneDrive is by far the most convenient, and it also undercuts both Dropbox and Box on price significantly.

Are Dropbox and Box doomed?
The key for both companies is to offer not just cloud storage, but services on top. Both companies have been moving toward this, with Dropbox creating APIs for developers to integrate the service into applications, and Box allowing for the editing of documents via Box Notes. Microsoft should be worried about any potential Office competitor, and Box Notes is certainly one of them, albeit a far less sophisticated product.

On the consumer side, Dropbox is going to have a very difficult time competing with the likes of Google. The company is valued at around $10 billion based on its last funding round, and if Dropbox IPOs at that market capitalization, the stock price will be about 50 times 2013 revenue. Even if Dropbox wasn't facing such monumental threats, 50 times sales is a preposterous price to pay. And given the competition and lack of any competitive advantage, Dropbox is definitely an IPO that should be avoided.

Box has a better chance than Dropbox, given its penetration into the enterprise market so far, although the company is facing both Microsoft and Google at the same time. It will take a lot more than simple file editing to displace Microsoft Office -- even Google has failed to do so thus far. Box generated $216 million of revenue in 2014, posting a massive $168 million loss. Box seems more likely to succeed in the long term than Dropbox, given its enterprise focus, but the road ahead is a very long one.

The bottom line
It's important to remember that a company and its private investors look to go public at the most favorable time, when the stock will fetch the highest price on the open market. For investors, this is often the least favorable time to buy the stock, as hope and euphoria are often at their peak. Both Dropbox and Box are facing an incredible amount of competition, and paying dozens of times revenue for either company is unlikely to lead to satisfactory results over the long term.

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