Dropbox’s likely IPO is set to be one of the largest offerings of the past few years, but the key question is whether the world’s largest cloud-storage company will go public at a valuation above its last primary round.

As successful as the company is, it’s quite possible the company’s IPO – which could raise more than $300 million – could wind up as a down round.

While mutual funds have recently lowered their valuation estimates for Dropbox, SharesPost Research’s upside case scenario concludes that the company could go public with a valuation comparable to its most recent private valuation – roughly $10 billion – if the company continues on its current trajectory.

That valuation is based on a projection that Dropbox’s 2020 forecasted revenue growth exceeds 25 percent and its 2020 forecasted operating profitability exceeds 10 percent. Even before an IPO, Dropbox could be an attractive acquisition target with large tech vendors including Amazon, Microsoft, Apple, and Google having aspirations in this space.

The positives

So what do investors thinking about an investment in Dropbox need to know? Let’s start with the positives.

1. Cloud storage is a huge opportunity. Computing, networking, and storage are the three pillars of cloud computing. Industry experts believe storage is undergoing a renaissance that will likely change the way computing and networking interoperate. My team’s analysis indicates that Dropbox’s serviceable market could grow to more than $75 billion in annual spend over the next five years. As a unique company with both B2C and B2B revenue streams, Dropbox benefits from cost and revenue synergies associated with product development and sales and marketing. Roughly 500 million Dropbox users work in 8 million businesses globally, leading to a clear upsell opportunity.

2. Dropbox is the market leader, along with Google. By the end of 2017, Dropbox will have registered roughly 650 million consumers globally. Our recent survey of 3,200 cloud storage users reveals that 97 percent of U.S. internet users have used online storage, 57 percent of U.S. internet users have registered with and actively used Dropbox in the past year, and 8 percent of respondents are active Dropbox users and have both personal and enterprise accounts. Business usage is split evenly across SMBs, mid-size companies, and enterprise companies, according to our survey.

3. Dropbox has an impressive financial track record. Dropbox is the only decacorn to generate free cash flow and to have reached EBITDA profitability. IDC Research noted that Dropbox was the fastest software-as-a-service (SaaS) company to reach $1 billion in annual recurring revenues. Our survey highlights a clear positive bias among personal and business users to spend more on Dropbox over the next 12 months.

4. Dropbox has the highest capital efficiency ratio among large unicorns. The company has raised more than $600 million in equity capital to date, with a post-money valuation exceeding $10 billion. This translates to a 16x multiple on invested capital (MOIC), which is highly favorable compared to consumer web peers, with MOICs ranging between 3x and 9x. We believe MOIC can be used as a proxy for current and potential profitability, as well as the maturity stage of the company’s business model.

5. Dropbox remains a potential acquisition target. Dropbox’s success in building out an enterprise-class content collaboration platform, coupled with its strong partnership ecosystem and significant anticipated growth in cloud-based content/work flow management, could lead investors to believe that the company is an attractive acquisition candidate. Given the acquisitive history of the SaaS market – and Dropbox’s unique market positioning – we expect some investors to also bring up past acquisitions as a valuation proxy.

What could go wrong

Dropbox is clearly benefitting from some strong secular trends, but cloud storage remains a fiercely competitive space occupied by the likes of Google; it’s also a very price sensitive space.

For investors, Dropbox faces a variety of significant risks.

1. Competition is tough and getting tougher. Over the past few years, Dropbox’s competitive headwinds from large tech companies have strengthened, likely leading to deteriorating marginal unit economics. At the same time, cloud storage is an increasingly commoditized product. Our analysis shows that 55 percent of surveyed consumers want more free space and 39 percent want better pricing. The proportion of active Dropbox users who would prefer more free space and better pricing is even higher.

2. Dropbox has unclear long-term profitability potential. The long-term cost structure and unit economics of online storage companies remains unproven and debatable. Over the long term, as Dropbox shifts from a B2C to B2B sales cycle, we expect organic customer acquisition to decline, likely leading to structurally higher spend compared to today’s levels. In making that transition, the company will have to make a number of strategic decisions that are inherently risky.

3. Price competition and price sensitivity are relatively high in cloud storage. Price remains a decisive factor in the decision-making process of selecting an online storage service provider. The cost per gigabyte continues to decline, but industry experts believe the rate of decline is slowing. Meanwhile, large tech vendors have been engaged in a price war.

4. Dropbox has arrived late to the enterprise market. While Dropbox benefits from managing two revenue streams, B2B and B2C, the company continues to play catch-up in the enterprise space.  The company launched Dropbox for Enterprise in November 2015, with compliance, security, and collaboration features, along with peripheral services and support. Our analysis indicates that Dropbox has made significant progress toward regulatory compliance, particularly in the U.S., but still trails large vendors’ compliance certifications, particularly for non-U.S. locations.

5. Dropbox faces challenges with public cloud reliability and hybrid deployments. Dropbox does not support hybrid or on-premises deployment architectures, only public cloud deployments. While the company hasn’t self-reported a major outage since January 2014, we believe it continues to face the bandwidth and connectivity challenges inherent in public cloud infrastructure. Larger vendors such as Amazon Web Services and Microsoft Azure have faced several issues with reliability in the past couple of years, and we think Dropbox might face similar growing pains.

This post is an excerpt from a larger SharesPost report, “Dropbox: Going From Storage to Collaboration and Profits.”

Rohit Kulkarni is Managing Director and Head of Research for San Francisco-based SharesPost.

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