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4 ETFs to Play if Dropbox Goes Public

Sanghamitra Saha
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Dropbox Inc., reportedly filed for a U.S. IPO with the help of Goldman Sachs Group and JPMorgan Chase & Co, as per sources. The file-sharing private company and other players associated with the apparently confidential IPO did not make any comments.

If Dropbox manages to garner something around $10 billion valuation it was rendered in its last private round, it would be the most valuable U.S. tech IPO since Snap early last year (read: Should You Invest in Snap Via IPO ETFs?).

WillDropbox See Success If it Goes Public?

Many may be spooked by the fate of Snap SNAP, shares of which were down 15% from its IPO, last March. But investors should note that Snap was a loss-making company when it went public. It incurred a loss of $515 million for 2016 and generated net revenues of $404 million.

On the contrary, Dropbox will hit the market with annualized sales of more than $1 billion. It has also been profit-generating, excluding interest, taxes, depreciation and amortization, as per Bloomberg. Also, “Dropbox could be one of the biggest U.S. enterprise technology companies to list domestically in recent years,” as per Bloomberg (read: 5 Reasons Why 2018 Could be Good for IPO ETFs).

As of August, Dropbox had 500 million users, including 200,000 business lines, storing and sharing files online through its cloud service. The service permits users store documents in a commonly accessible place without the need of building their own servers or storages.

With cloud computing increasingly becoming the name of the game for business operations these days, Dropbox should see super success ahead. As per a source , spending on cloud computing services is rising faster than earlier anticipated, with software-as-a-service (SaaS) and infrastructure-as-a-service (IaaS) deserving special mention. Capital is being deployed in sectors including government, health care, manufacturing and retail (read: Why Cloud ETFs Could Soar Ahead).

Dropbox is likely to promote its own cloud which took hundreds of millions of dollars. With this the company reduced its dependence on Amazon.com Inc.’s servers. The move allowed the former fund to cut costs, as noted by Chief Operating Officer Dennis Woodside in an interview last year.

The trial for IPO is not unexpected. Many analysts expected an uptick in unicorn IPOs this year. Unicorns are small- and mid-sized firms valued at more than $1 billion. Dropxbox “was the first so-called unicorn, or highly-valued private tech company, to top the $10bn mark when it raised money in 2014,” as per Financial Times.

ETFs to Watch

Though the following ETFs don’t presently own any share of Dropbox, the IPO of the company (if happens) might see its addition in a number of funds in the near future. Below we have highlighted four ETFs that might consider including Dropbox in their holdings after IPO, or at the very least, be in focus given the recent IPO boom:

First Trust US IPO Index Fund FPX
 
The product tracks the IPOX-100 U.S. Index, giving exposure to the booming U.S. IPO market. The ETF focuses on 100 largest and most liquid U.S. IPOs. This is a rules-based value-weighted index measuring the average performance of U.S. IPOs during the first 1000 trading days. 

The product holds a basket of 100 stocks with AbbVie (7.9%), PayPal (7.9%), and Kraft Heinz (7.9%) taking the top three spots. The product has a nice mix of sectors, with the top four being Information Technology, Consumer Discretionary, Healthcare and Consumer Staples (read: Profit from the Booming IPO Market with This ETF).
 
Renaissance IPO ETF IPO
 
The fund gives exposure to the U.S. IPO market. The ETF tracks the rules-based Renaissance IPO Index, which includes sizeable new companies on a fast entry basis and the rest upon scheduled quarterly reviews. The product charges 60 basis points as fees.

First Trust Cloud Computing Index Fund SKYY

This fund provides exposure to cloud computing securities by tracking the ISE Cloud Computing Index. Holding about 30 stocks, it is pretty well spread out across components with none holding more than 5.0% of assets. Software firms dominate this ETF, accounting for about 38% share. Internet Software & Services and Communications Equipment hold the next two spots. It has 0.60% in expense ratio.

First Trust Dow Jones Internet Index Fund FDN

Dropxbox can also make it to this ETF. Amazon and Alphabet, both big on clouds, got a place in the 42-stock fund. It charges 54 bps in fees.

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