So much hype pervades the cosmos when it comes to valuation methods and start-ups or tech/IT related businesses. And Dropbox has its fair share of hype.
It is about to raise up to $648 million in its upcoming IPO, and pundits have suggested it will be valued at more than $19b! (https://pitchbook.com/news/articles/why-dropbox-could-be-valued-at-19B-when-it-goes-publi).
But as much as the valuations are stratospheric it is interesting to see how they have valued the IT darling - they are using a "comparables method".
In essence they have been compared to Atlassian and Box using a range of different metrics to arrive at a valuation range. Now, as always, the value of a business is no more or less than the price buyers are willing to pay. And with the usual disclaimers, the long term value of Dropbox will be determined by the extent to which management can deliver results.
But that said the blog article listed above used a revenue multiple derived from the comparison with Atlassian and Box. They showed that each had similar revenue growth rates, Atlassian was reporting a positive free cash flow for the last twelve months and the two businesses spanned the wide range of enterprise values that Dropbox is likely to take.
In the end, Dropbox value was determined on a revenue multiple that is mid-range between Atlassian and Box, and tending to the upper side of the range to account for increased size, capital raised, established market place and growth rate.
It is typical to price IT-related businesses as a multiple of revenue, as often this is the only metric that is consistent from start-up to profitability. In essence investors are saying that the higher the revenue levels, the more valuable the business is, and that given the low ongoing variable costs of something like Dropbox (or other IT-cloud based businesses), profits will flow once development has ceased (and software developers move onto the next big thing) and the market has been established.
Many SMEs are valued using the comparables method, and we look for similar traits:
Does the businesses share similar markets?
Do they undertake similar activities?
Is revenue and EBITDA results of a similar size?
In essence we are trying to look for similar risk profiles. Two businesses may not be identical - but they may have similar risk levels. In this case they can be used to infer a value based on some common metric.
Revenue multiples for SMEs tend to be more erratic and show a wide range of values on the open market. For these reasons we tend not to rely on them as a primary valuation method, but often provide a useful and supportive cross check method.
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