Dropbox is set to be the biggest tech IPO since Snap (SNAP). Is the market hungry enough to justify the expected $7 billion valuation? Or, is this IPO how insiders sell stock and raise capital after the “smart money” (i.e. private equity, hedge funds, etc.) has dried up? Given Dropbox’s losses, fierce incumbent competition, and relatively small paying user base, the latter seems more likely. Dropbox (DBX) is in the Danger Zone this week.

Has the “Smart Money” Dried Up?

At the midpoint of Dropbox’s expected price range, its post IPO valuation would be nearly one-third below the $10 billion valuation it earned in 2014. Why would a tech firm with revenue growth upwards of 30% per year need to lower its valuation, if not to attract mainstream (non-insider) investors? Private markets are no longer interested.

Could Dropbox’s IPO be another overpriced offering that leaves investors holding the bag? Look no further than Snap’s recent IPO for a cautionary tale on sell-side research.

Share Class & Voting Structure Aren’t Truly Public

Dropbox’s multiple share classes and voting rights would lend further evidence that the firm isn’t truly interested in going public, in the true sense of the word. Following suit with Snap and other firms such as Facebook (FB), Dropbox’s share structure gives founders, executives, and early investors significantly more voting rights. Holders of class B shares (which are entitled to 10 votes per share) will hold 98% of the voting power following the IPO. Class A shares, which are being sold in the IPO, are entitled to just one vote per share.

This share structure also means that Dropbox will be ineligible for inclusion in S&P and FTSE Russell indices, such as the S&P 500 or Russell 2000. Ultimately, Dropbox is going public and enjoying the benefits of an IPO (influx of cash) while giving away very little voting power to new investors. In addition, it will not benefit from inclusion in many ETFs and index funds.

Dropbox’s Large User Base Is Not Profitable

If IPO investors get little say in the way Dropbox is run, what are they getting? Certainly, not any profits. Dropbox’s revenue growth is slowing. Revenue growth dropped from 40% in 2017 to 31% in 2016. Paid users grew by 35% in 2016 and 25% in 2017, while average revenue per paid user has barely changed.

Dropbox’s after-tax profit (NOPAT) was -$55 million in 2017 and Its NOPAT margin was -5%. The company earned a return on invested capital (ROIC) of -4%. Despite amassing a large user base over the past decade (500+ million), Dropbox has yet to monetize these users in a profitable manner.

“Infrastructure Optimization” Benefits Set to Expire

Dropbox’s income statement makes it appear as if the firm is rapidly approaching profitability. The company’s losses have declined, cost of revenue has fallen, and its revenue growth outpaces key operating expenses, such as sales & marketing.

However, when you look beneath the surface and remove accounting distortions, Dropbox’s profitability is headed the wrong direction. The recent reduction in cost of revenue was a byproduct of Dropbox’s “infrastructure optimization”, in which user data was moved from third-party service providers to co-location facilities Dropbox manages and leases. Now that the initial efficiency gains and transfer are complete, costs are expected to rise again. The company notes in its S-1 that its plans to increase the capacity of its infrastructure to support user growth, which will cause cost of revenue to begin increasing again.

Transitioning to its own leased facilities does not eliminate costs. It just moves them from the income statement to the balance sheet.While cost of revenue fell $22 million in 2017, the company’s off-balance sheet debt from operating leases totaled $973 million. This off-balance sheet debt dwarfs (346% of net assets) Dropbox’s reported net assets and the cost savings touted by management, but must be taken into account when valuing Dropbox.

Some Expenses Growing Faster Than It Would Appear

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