Anticipated IPOs of 2018
By Chirag Gandhi
The start of a new year also marks the beginning of a new wave of IPOs. An IPO is characterized by a private company going public to increase market exposure and obtain large amounts of capital for growth. For investors, IPOs provide an intriguing opportunity to invest as these companies are experiencing rapid growth with little historical information available to investors. Hence, there is a high level of volatility in stock prices as seen by Snap Inc’s (SNAP: NYSE) IPO in March 2017 ranging from a high of $27 USD in March 2017 to a low of $12 USD in August 2017 after dismal earnings. Thus, investors are approaching the next big wave of IPOs in 2018 with a lot more caution but still with a lot of excitement for the future potential of these companies.
Airbnb: Valuation: $31 Billion USD in 2017
Founded in August 2008 by Brian Chesky, Joe Gebbia, and Nathan Blecharczyk, Airbnb is a mobile application and website that connects individuals looking for accommodations with others offering their personal houses, apartments and chalets for short-term rent. They have over 150 million users across 191 countries with more than 3 million listings. Airbnb reportedly made their first profit in 2017 and in October 2017, CEO Brian Chesky hinted that they “would be ready as absolutely soon as [Airbnb] can” regarding a future IPO.
Airbnb faces many legislative challenges and internal questions before an official IPO filing can be submitted. First, there have been many disputes with local governments regarding the collection of booking fees and taxes. The company has tried to deny responsibility for the way property owners use its service, yet governments have nonetheless succeeded at imposing rules on Airbnb. In addition, concerns about neighbourhood code violations from short-term rentals such as parking and noise have increased significantly in the past few years.
Airbnb is in a relatively healthy financial position to file for an IPO as soon as possible, but internal uncertainty has slowed down this process. The company’s top management is worried that their culture would crumble as a result of their extremely fast paced growth. Therefore, it is safe to say that an Airbnb IPO may not come as soon as investors expected, since management is in the process of fixing gaps in the business model.
Dropbox: Valuation: $10 Billion USD in 2017
Dropbox was founded in 2017 by Drew Houston and Arash Ferdowsi. The services offered by Dropbox include cloud storage, file synchronization and client software. These services can be accessed via computer, tablet or mobile device from across the world in real-time. They have over 500 million users, all of whom benefit from 2 GB of free storage which can be expanded through referrals. Additional storage and business options are available for increased monthly fees ranging anywhere from $20 to $40 USD per month. Dropbox would become public with annualized sales of more than $1 billion USD and a positive EBITDA, or operating profitability before non-operating expenses.
Unlike Airbnb, Dropbox’s challenges come mainly from its competitors. Users have alternatives such as cloud services for personal or business use offered by Apple (AAPL: NASDAQ), Microsoft (MSFT: NASDAQ) and Google (GOOGL: NASDAQ). Moreover, Dropbox continuously faces challenges in the protection of personal data from hacks and leaks. Investors have been keeping a close eye on Dropbox’s ability to offer new products. For example, Dropbox’s “Paper” software provides a virtual white space where employees can share spreadsheets, Google Docs, and other digital documents regardless of the type of hardware they are using. Hence, Dropbox is focusing on developing new products and services to diversify their business model before going public.
According to BNN (2018), Dropbox has started the legal process of filling for their IPO with the help of Goldman Sachs (GS: NYSE) since the beginning of the year. In late 2017, JPMorgan (JPM: NYSE) gave a $600 million USD credit line to Dropbox to provide financial liquidity before embarking on an IPO. Dropbox will hold a press conference at the end of January to publicly disclose information regarding the IPO process and to start drawing interest from the market.
The Bottom Line
Given that the market is a dynamic environment, both IPOs will not be finalized until the official announcement is made by the U.S. Securities and Exchange Commission. Dropbox seems to be targeting a mid 2018 IPO barring any surprises in the market. On the other hand, Airbnb’s IPO would only be feasible towards the end of 2018 or early 2019. Airbnb faces more internal concerns compared to Dropbox, though Dropbox is in a highly competitive environment. Amidst the anticipated IPOs of Airbnb and Dropbox, it is safe to say that these companies will proceed with caution to avoid a major drop in valuation as faced by Snap Inc’s IPO.