Should Dropbox Really Be Worth More Than Box Inc.?

Image source: Getty Images.

With a valuation slightly more than six times larger than publicly traded rival Box (BOX -1.60%), cloud storage upstart Dropbox has drawn plenty of criticism for what some perceive to be its "lofty" valuation.

Turns out, the detractors are likely correct.

Though lacking the public data a Dropbox IPO would provide, Dropbox's mix of revenue growth and intensified competition make the cloud storage upstart's valuation appear unjustifiably rich. Here's why.

How much is Dropbox worth?

Dropbox's most recent round of equity fundraising officially valued the company at a whopping $10 billion in January 2014. This valuation nominally places Dropbox amid the rarified air of start-ups carrying 11-figure valuations, colloquially referred to as "decacorns" in Silicon Valley jargon. 

However, the company's 30-month-old official valuation doesn't necessarily reflect the likely growth arc at Dropbox, either (more on that below). Importantly, though, in terms of discussing Dropbox's valuation, a number of the company's own investors have already concluded the memory storage company isn't worth $10 billion.

Image source: Dropbox.

Partially in reaction to stock market sell-offs in late last year and earlier this year, large mutual funds began marking down the value of certain start-up investments. For example, mutual fund giant Fidelity marked down the value of its Dropbox stock holdings by 20% in Q1, though it had already reduced the value of its Dropbox stake at least once before. Additionally, T Rowe Price reportedly wrote down its internal valuation of its Dropbox shares by 51% in the fourth quarter of 2015.

Though no hard-and-fast rules exist governing how mutual funds value their start-up holdings, companies typically utilize a mix of company-specific financial information and external market data to value their start-up stocks. Therefore, as with publicly traded stocks, a mutual fund lowering its holding value for a start-up stock could largely be a byproduct of market conditions rather than a statement on a company's performance.

That being said, in the case of Dropbox's falling valuation in some camps, it's hard not to think some of the newfound bearishness in its private stock price doesn't reflect changes in its business outlook as competition from Box, Apple, Amazon, and Alphabet has increased significantly in the past several years. However, even at the lower internal valuations reported by the media, Dropbox's valuation remains significantly higher than public competitors like Box. Does that make sense?

Should Dropbox be more valuable than Box? 

Establishing an approximate value for Dropbox is difficult largely because of the lack of publicly available information. However, what little we do know seems to suggest Dropbox should indeed be more valuable than Box.

Image source: Box.

The most credible revenue estimate we have for Dropbox comes from 2014, when the cloud storage start-up was said to have earned $400 million as it raised funds for its current official $10 billion valuation. Dropbox has confirmed that revenue has since grown, but it's anyone guess exactly to what degree. However, the fact that Dropbox's 2014 revenue was already higher than the $327 million Box has earned in the last 12 months supports the idea that Dropbox should indeed be worth more than Box. This, of course, overlooks other important factors, like profitability, at both companies, but it at least provides us some basis for comparison between them. As to the question of whether Dropbox is overvalued at its $10 billion, it seems the answer to that is also likely yes.

Box currently trades at a price-to-sales ratio of 4.6 times its last 12 months' revenue. In order for Dropbox to match Box's valuation on a price-to-sales basis, Dropbox would have had to grow its $400 million in 2014 sales a whopping 223% in each of the past two years to trade at the same 4.6 times price-to-sales ratio as Box. Though certainly possible, growing revenues so quickly at scale is a relatively infrequent occurrence. So although we can't know for sure, the scant public data seems to suggest Dropbox should indeed be worth more than Box, but perhaps not to the extreme degree Dropbox's $10 billion valuation might imply.