The Exchange

Storage Is the New Sexy — Why Dropbox Is Likely Worth $8 Billion

The Exchange
Dropbox CEO Houston speaks at TechCrunch Distrupt 2013 in San Francisco
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Drew Houston, CEO and Co-Founder of Dropbox, speaks on stage during a fireside chat session at TechCrunch Disrupt SF 2013 in San Francisco, California September 9, 2013. REUTERS/Stephen Lam

People with smartphones like to take pictures – lots of pictures. One estimate pegs the total number of digital photos to be snapped next year at 880 billion. And while many of the photos will never be looked at again, hardly anyone takes the trouble to delete their out-of-focus selfies and blurry pet shots.

So it should come as no surprise that Dropbox, a leading photo- and file-storage service, is seeking to raise another $250 million from Silicon valley on terms that would value the company at $8 billion, as Bloomberg Businessweek reported Monday.

With the seemingly ever-growing need for storage, Dropbox itself has been growing quickly. The company doubled its user base this year to 200 million and revenues are said to exceed $250 million (even closing in on $1 billion, according to one report).

A working business model

Unlike many of its cloud-service brethren, Dropbox has a working business model. Users can sign up for a small, free account of 2 gigabytes. As the free accounts inevitably fill up, some customers opt for additional storage starting at $10 a month. A service tailored for businesses starts at $795 a year.

Dropbox, started in 2007 by a couple of MIT students, made its name as the simplest way for regular consumers to synchronize all their files between a desktop and a laptop. Every file in the Dropbox folder simply appeared on both machines. But over the past few years, Dropbox has also become a preferred way to handle moving files on and off phones and tablets, where syncing was an even more unpleasant and unreliable chore.

Last year Dropbox cleverly added a feature to its mobile apps to automatically upload every photo taken on a user’s smartphone to Dropbox servers for syncing and safekeeping (with the user’s permission). Users could win additional free space for photos by convincing friends to sign up. By making uploading and syncing automatic – and invisible to the user – Dropbox helped fill its servers faster, and convinced more users to pay for additional space.

Lately the company has been pushing hard to gain more business users, a group willing to pay higher rates for more-secure and reliable backup.

An initial public offering can’t be too far off. Co-founder and CEO Drew Houston played coy at a conference in September. “I'm sure we'll go public at some point but fortunately it's not something we have to think about right now,” Houston said at the Disrupt SF conference. “We’re enjoying the time when we can just focus on the long term.”

Investors are clamoring for true growth stocks, as Twitter’s (TWTR) recent blockbuster IPO made clear. And long before anyone offered to buy Snapchat for a few billion dollars, Houston and his team famously turned down a reported "nine-digit" acquisition bid offered personally by Steve Jobs in 2009.

A reasonable valuation

Valuing Dropbox at $8 billion seems completely reasonable in light of other recent Internet IPOs. Twitter had revenue of $317 million – and no profits in sight -- the year before it went public at a value of over $18 billion. And its active user base of 185 million at the end of 2012 was smaller than Dropbox’s is now. Workday (WDAY), which provides HR software over the Internet, is valued at nearly $13 billion with no profit and revenue of $353 million over the 12 months ended July 31.

Dropbox’s rapid growth has come despite competition from the biggest names in tech. But Apple’s (AAPL) iCloud is dogged by reliability questions, Google (GOOG) drive doesn’t have the same ease of use and Microsoft’s (MSFT) Skydrive hasn’t taken off. They've left plenty of customers hankering for what Dropbox offers.

The push to expand from consumers to businesses should keep revenue growing. Last week Dropbox unveiled a new feature to separate a user’s personal and business data into separate folders on the same device. That lets the user share spreadsheet edits with the boss but keep pictures of the kids private.

Competitor Box.net has been more oriented toward business users so far, with specially designed services for law firms and healthcare providers, for example. Box was valued at more than $1 billion when it last raised venture capital. The company selected Wall Street banks Morgan Stanley (MS), Credit Suisse and JPMorgan Chase (JPM) to lead an IPO early next year, according to a report from Reuters.

It’s even been a great year for plain-old hard-drive makers. Western Digital (WDC) is up 75% this year, with investors excited by growing sales to data centers even as demand for drives in PCs slipped. Shares of Seagate Technology (STX) have added 59%, even after disappointing third-quarter results. Both companies bolstered margins and market share over the past three years through consolidation.

PC sales may continue to fall but the higher-priced drives sold to data centers, like those run by Dropbox, rely on proprietary technologies to speed file transfers. Western and Seagate have already snapped up smaller competitors targeted at the data-center market.

With the overall economy expanding slowly, investors are racing after growth stories like Dropbox. And that’s how once boring storage became the new sexy.

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