Risk sentiment strong despite trade war, rising yields
The latest and biggest round of US-China tariff threats has failed to dent risk sentiment, which was perhaps also boosted by China’s avowal not to devalue its currency as part of the trade war.
Head of Editorial Content, Saxo Bank
The US technology sector might have lost billions in valuation this week, but investor interest in cloud-storage firm DropBox's IPO remained strong with the company raising $750 million (with shares trading at $21) ahead of its first day of trading on the Nasdaq exchange.
The performance of DropBox shares over the coming quarters may well serve as a bellwether for the ailing sector as markets determine the proper valuation of, and levels of interest in, tech firms in 2018.
"Based on the demand we see from our clients and the fact that the IPO price range was raised by over 10% to $18-20 per share it seems overall demand is very strong," says Saxo Bank head of equities strategy peter Garnry.
"This likely due to the name recognition of Dropbox – it is, after all, the largest cloud-based storage platform. However, the overall IPO market has been weak the past year and the Snap IPO was a big disappointment, so sentiment is fragile right now," adds Garnry.
Although DropBox's post-IPO market capitalisation of around $8.3 billion may reflect strong investor interest, the valuation still falls short of the $10bn estimated in 2014's funding round.
In Garnry's view, there are several factors behind this difference. "DropBox's biggest competitor, Box, went public in 2015 and its life as a publicly listed company has not been rosy. Growth has been weaker than initially estimated and the cash flow generation is still low compared to the enterprise value, saxys Saxo's equities head.
"The overall problem, though – which is also hurting Dropbox – is fierce competition with Microsoft and Google, who are pushing their own cheap storage offerings. This has lowered revenue per user over the past years."
Unless DropBox's business model changes, "it is difficult to see this becoming a high-margin business", Garnry concludes.
In the short- to medium-term, DropBox's performance will be tied closely to overall market and sectoral sentiment. US equities have not enjoyed a strong week and Garnry reiterates his view that "the recent weakness in US technology sector is not healthy for this stock [and] our view on equities remains broadly defensive."
DropBox shares will be available via the Saxo platform as of today's New York open.
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