Why the Dropbox and Box IPOs Should Be Avoided

Two of the most highly anticipated IPOs expected to take place sometime this year are Dropbox and Box, rivals in the cloud storage market. Dropbox has amassed around 200 million users, mostly consumers, while Box is focused on the enterprise segment, claiming more than 20 million users at 180,000 businesses. But with the cloud storage market heating up, and with companies like Google (NASDAQ: GOOGL  ) and Microsoft (NASDAQ: MSFT  ) all vying for a piece of the pie, does either Dropbox or 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 Google's recent price drop on its Google Drive service, the picture doesn't look pretty for the upstarts.

Based on 100 GB personal annual plans, or monthly plan if no annual plan is available

Google Drive offers the most free storage to users with 15 GB, followed by Box with 10 GB, Microsoft's OneDrive with 7 GB, and Amazon's Cloud Drive with 5 GB. Dropbox offers only 2 GB, and SugarSync, another popular service, recently stopped offering free storage entirely. Some of these companies allow users to earn additional free storage through referrals and other means, but the real story is the cost to buy additional storage. After Google's price drop, $1.99 per month will get users an additional 100 GB of space, with a terabyte of space costing just $9.99 per month. Dropbox charges $99.99 per year for 100 GB, putting the equivalent plan on Google Drive at less than 25% of that price. Box charges $10 per month for 100 GB, putting the company in the same predicament.

Even before Google's price drop, both Dropbox and Box were still more expensive than either Microsoft or Amazon. I suspect that Microsoft and Amazon will cut prices in order to compete with Google, leaving smaller competitors in quite a pickle.

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 up to 100 GB of free storage can be obtained through an Office 365 subscription. For Windows users, OneDrive is by far the most convenient, and it also undercuts both Dropbox and Box on price significantly. Office 365 plans for businesses include 25 GB of cloud storage space per user, and with Microsoft Office still the de facto standard in enterprise, OneDrive is a compelling choice for businesses.

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 expects its revenue to more than double to $200 million this year, putting the $2 billion valuation from the last round of funding at 10 times the projected sales, and more than 20 times sales from 2013. 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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Read/Post Comments (5) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 19, 2014, at 4:16 PM, sphouzz wrote:

    Dropbox has plenty of cash and should look to scoop up a couple of the developers that will add the most value for enterprises.That should be a pre-ipo priority.

  • Report this Comment On April 03, 2014, at 3:27 PM, emilykulish wrote:

    Do you still believe that Box is doing better than Dropbox now we know that it lost $169M last year, while the revenue was only $124M?

    Google's cheap storage price affects the consumer business, but all enterprise service companies charge for user licenses. The problem for Box is it charges $180/user/year, which is more expensive than most other competitors.

  • Report this Comment On April 03, 2014, at 9:30 PM, caltowns wrote:

    Great article, Box and Dropbox are going to fall apart in the coming years. People still hang on to this idea that Dropbox is going to be king, but they're probably worse off than Box is in terms of losses. Now Google and Microsoft and other companies like SpiderOak and DriveHQ are slashing prices in the market that Box and Dropbox are trying to win. I just don't see it happening for either company.

  • Report this Comment On April 10, 2014, at 3:13 PM, jarciprete wrote:

    You are missing the point with that is the essence of dropbox - they get usability, just like Apple. A usable app always is worth the extra money. I see dropbox becoming much like Apple - gaining more users by just making things super easy. People will pay and I hope they never lower their price. Dropbox, Mailbox and Carousel are apps that are just amazing. Like the old saying goes - you get what you pay for.

  • Report this Comment On May 28, 2014, at 7:28 PM, BenDINO wrote:

    "Cloud storage is a commodity, and additional services on top of that cloud storage is the differentiator".

    This is the reality, storage is cheap and probably will be free for users soon.

    I think the next generation of cloud storage will come with ECM integration and inteligent storage.

    Some project take this way as dino.mx and will totally change the rules on storage services.

    Ben

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