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Even if Dropbox can grow revenue by 14% compounded annually for five years and achieve a 4% NOPAT margin, the firm is worth less than $19/share. Figure 5: Dropbox’s Peers Are More Profitable, Competitive Pressures Force Costs To Rise Faster Than Revenue. Figure 2: Dropbox’s YoY Change in Paying Users Since 2016, Dropbox Has to Steal Users From Deeply Integrated Solution Providers. Dropbox has a share of 34.44% in the online file hosting industry. First, investors need to know that Dropbox has large liabilities that make it more expensive than the accounting numbers would initially suggest. Dropbox. Dropbox’s share of the global cloud storage market has fallen from 4.4% in 2017 to 3.6% in 2019 as more competitors enter the space and existing competition ramped up storage options. Since I first placed it in the Danger Zone, DBX is down ~8% while the S&P 500 is up 24%. Investors with fiduciary responsibilities should consider the deteriorating fundamentals, weak competitive position, and the unrealistic user growth implied by the current valuation. WebDrive has a share of 13.13% in the market. Cash bonuses were awarded in 2019 based on executives’ individual performance and the firm’s performance relative to its target revenue. In this scenario, Dropbox grows NOPAT from -$43 million in 2019 to $163 million in 2027, and the stock is worth just $7/share – a 63% downside. In other words, DBX’s current valuation implies the company will grow its paying user base to equal 30% of Amazon Prime members and 22% of Microsoft Office 365 subscribers today. Figure 11: DBX Has Large Downside Risk: DCF Valuation Scenario. In the second scenario, the estimated revenue growth rate for year one is 14% in years one through five. As featured in the HBS & MIT Sloan paper, Core Earnings: New Data and Evidence, our superior data drives uniquely comprehensive and independent debt and equity investment ratings, valuation models and research tools. Fiduciaries should avoid this week’s Danger Zone pick: Dropbox Inc. (DBX). However, the cost per user, or average operating expense per paying user (AOEPU) has risen even faster from $85 in 2016 to $99, or 5.2% compounded annually in 2019. Most of Dropbox’s competition is more profitable too. I also optimistically assume Dropbox achieves a 4% NOPAT margin, which is above Dropbox’s TTM margin of 2% and Salesforce’s TTM margin of 1%. Dropbox should link executive compensation with improving ROIC, which is directly correlated with creating shareholder value, so shareholders’ interests are properly aligned with executives’. Dropbox’s share of the global cloud storage market has fallen from 4.4% in 2017 to 3.6% in 2019 as more competitors enter the space and existing competition ramped up storage options. After adjusting for all liabilities, I can model multiple purchase price scenarios. Over the past three years the firm has incurred $1.1 billion in stock-based compensation expense. Dropbox has generated negative economic earnings in each of the past four years. 2. This peer group includes Apple, Microsoft, Alphabet, Amazon, and Box. Figures 12 and 13 show what I think Salesforce should pay for Dropbox to ensure it does not destroy shareholder value. As investors focus more on fundamental research, research automation technology is needed to analyze all the critical financial details in financial filings as shown in the Harvard Business School and MIT Sloan paper, “Core Earnings: New Data and Evidence”. This adjustment represents 13% of Dropbox’s market cap. New Constructs provides unrivaled insights into the fundamentals and valuation of private & public businesses. With our CloudRail API Integration Solution we help developers to connect to various APIs much faster. Over the past three months, insiders have purchased 4 thousand shares and sold 99 thousand shares for a net effect of 95 thousands shares sold. 1800 Owens St Sharing. Competitors, DBX Implied User Growth Justification Scenario 1, Dropbox Has Significant Downside With More Realistic User Growth. Memory clean, files safe, Get 1TB Cloud Storage for FREE. The following funds receive an unattractive-or-worse rating and allocate significantly to DBX: Disclosure: David Trainer, Kyle Guske II, and Matt Shuler receive no compensation to write about any specific stock, sector, style, or theme. EY & Citi On The Importance Of Resilience And Innovation, Impact 50: Investors Seeking Profit — And Pushing For Change, Michigan Economic Development Corporation With Forbes Insights, Casey’s Stock Looks Expensive In the Long Run, Face Reality: Pit Yourself Against Nasdaq 100, Dow Jones Today: Stocks Erase Losses, Coronavirus Variant Vaccine Possible; Apple Thinking Of Apple Car, Apple’s Rumored EV Project Is A True Threat To Tesla’s Hype Machine, MDU Resources: Low Risk Bet On An Infrastructure Boom, Virus Stimulus Bill Mandates Pointless Pollution Study, Auto Retailer Drives Lower After Q3 Report, See the math behind this reverse DCF scenario, directly correlated with creating shareholder value, Competition deeply already integrated with target users, Doing the math: the stock price implies Dropbox can acquire 44 million paying users, equal to 30% of Amazon Prime members and 22% of Microsoft Office 365 subscribers, Grow revenue at 17% (vs. average consensus estimates from 2020 to 2022 of 12%) compounded annually over the next eight years, Immediately achieve a 7% (vs. Amazon’s TTM margin of 5%) NOPAT margin, Grow revenue at 11% (equal to 2021 consensus estimate) compounded annually over the next eight years, Immediately achieve a 4% NOPAT margin (double TTM margin of 2%), $864 million in operating leases (11% of market cap), $18 million in outstanding employee stock options (<1% of market cap), Deeply embedded competition with deeper pockets, Lack of significant and durable competitive advantages, Valuation implies massive paying user growth, PartnerSelect Smaller Companies Fund (MSSFX) – 2.7% allocation and unattractive rating, Catalyst Buyback Strategy Fund (BUYCX) – 2.6% allocation and very unattractive rating, Columbia Seligman Comm & Info Fund (SLMCX) – 2.0% allocation and unattractive rating, Columbia Seligman Global Technology Fund (SHGTX) – 2.0% allocation and unattractive rating. I think potential acquirers would be better off leaving cloud storage to the firms that can offer cloud storage as a free add-on to their deeply integrated services, but stranger things have happened than firms being acquired at unnecessarily high premiums to their intrinsic value. The following are the data based on 48,262 companies that use file hosting services of various companies, including Dropbox. There are currently 20.7 million shares sold short, which equates to 5% of shares outstanding and just over three days to cover. For this analysis, I chose Salesforce.com Inc. (CRM) as a potential acquirer of Dropbox since Dropbox already integrates with Salesforce’s cloud-based platform and such vertical integration would give Salesforce greater in-house services and access to Dropbox’s over 600 million registered users. 1.2 Market Analysis by Personal Cloud Storage, Public Cloud Storage, Private Cloud Storage, Hybrid Cloud Storage 1.3 Market Analysis by Enterprise, Government, Personal 1.4 Market Analysis by North America, Europe, China, Japan, Rest of the World 1.5 Market Dynamics 1.5.1 Market Opportunities 1.5.2 Market Risk 1.5.3 Market Driving Force. Critical Details Found in Financial Filings by My Firm’s Robo-Analyst Technology. He is author of the Chapter “Modern Tools for Valuation” in The Valuation Handbook (Wiley Finance 2010). Dropbox not only has to convince customers not to use Apple’s convenient and competitively-priced service, but it also must convince them that Dropbox’s service is meaningfully better. You can see all the adjustments made to Dropbox’s income statement here. Dropbox cloud storage offers a range of plans that uniquely meet personal, small and large business plan needs – from 2 TB to unlimited space. Figure 6: AOEPU as a Percent of ARPU Since 2016. At the end of January, the consensus estimate for Dropbox’s 2020 earnings was $0.57/share. Consequently, these firms can offer cloud storage for free and still make plenty of money while Dropbox must make money on cloud storage. This scenario represents the minimum level of performance required not to destroy value. Despite years of rapid revenue growth and reaching profitability, the future for this cloud-based storage provider is murky at best. David is a distinguished investment strategist and corporate finance expert. David is CEO of New Constructs (www.newconstructs.com). Figure 3 shows some of Dropbox’s direct competitors and their number of users, who have access to a free version of what Dropbox offers. The stock will also likely sink should any of its competitors get more aggressive and offer more cloud storage at even lower prices so that Dropbox’s value proposition gets only weaker. Figure 1: Dropbox’s YoY Revenue Growth Since 2016. 20% of iCloud customers were paying users in 2018, the last time Apple shared that stat. Catalyst – Slowing Revenue Growth With Increased Expectations. ... Dropbox is a file hosting service that offers cloud storage, file synchronization, personal cloud, and client software. Figure 7: Dropbox’s Reported FCF vs. Below are specifics on the adjustments I make based on Robo-Analyst findings in Dropbox’s 10-Qs and 10-K: Income Statement: I made $67 million of adjustments, with a net effect of removing $9 million in non-operating expenses (1% of revenue). Free Online Storage, Dubox Cloud Storage: Cloud Backup & Data backup, Dubox: Cloud Storage to Backup, Sync&File upload, Dropbox Passwords - Secure Password Manager, Cookies help us deliver our services. To further illustrate the extraordinarily high growth expectations embedded in Dropbox’s stock price, I compare Dropbox’s implied paying users to the paying users of competitors. If Dropbox cannot outgrow the competition in such a favorable environment, will it ever? Microsoft one drive is at 12.12%. Its share price DBX is down ~8% while the S&P 500 is up 24% over the last year or so. Figure 6 illustrates that AOEPU is rising as a percent of average revenue per user and remains a significant impediment to the profitably improvements implied by the stock price, as we’ll show later. Often the largest risk to any bear thesis is what I call “stupid money risk”, which means an acquirer comes in and buys Dropbox at the current, or higher, share price despite the stock being overvalued. While many cloud storage systems focus on collaborating on smaller files, Dropbox makes it easy for businesses to share large documents, or video files that might not be shareable on other cloud storage systems. Dropbox, Inc. write a review. Dropbox lets anyone upload and transfer files to the cloud, and share them with anyone. This report helps investors of all types see just how extreme the risk in DBX is based on: While Dropbox has grown revenue from $845 million in 2016 to $1.8 billion TTM, the firm’s year-over-year (YoY) revenue growth rate has fallen from 40% to 18%. Having been an early mover in the cloud-computing market in 2007, it's been able to sustain a sizable market share of this proliferating segment. It’s worth noting that any deal that only achieves a 6% ROIC would not be accretive, as the return on the deal would equal Salesforce’s WACC. See the math behind this reverse DCF scenario. Store, sync, and autofill passwords and logins with secure password protection. Despite focusing on workflow optimization and adding product features such as HelloSign, Passwords, and Spaces, Dropbox has been unable to reverse its declining growth rates. Even in this best-case growth scenario, the implied value is far below Dropbox’s current price. Should the firm have its first earnings miss, investors could get spooked and send shares lower. And with advanced sharing features, it’s easy to share docs and send files—large or small—to family, friends, and co-workers. Dropbox is at a disadvantage when it comes to competing for its competitors’ users. Valuation: I made $2.1 billion of adjustments with a net effect of decreasing shareholder value by $90 million. Dropbox differentiated itself from Box by focusing on mass-market cloud storage while Box concentrated on helping businesses. Dropbox, Inc. The market also expects Dropbox to lose more market share given that the global cloud storage market is expected to grow much faster (by 22% compounded annually from 2020 to 2025). The number of shares sold short has increased by 4% since last month. When I close the accounting loopholes, I find that over the past three years, Dropbox generated a cumulative $329 million in true FCF and that FCF is rapidly declining. Because Google … There are limits on how much Salesforce should pay for Dropbox to earn a proper return, given the NOPAT or free cash flows being acquired. These days, fewer investors pay attention to fundamentals and the red flags buried in financial filings. With COVID-19-induced disruptions forcing most businesses to adapt their operations to be more remote friendly, Dropbox was in prime position to gain market share. A new report by Unified API integration leader CloudRail shows that Dropbox leads the consumer cloud storage market with 63.8%, ahead of Google Drive, OneDrive and Box of all users choosing their service.. A newer version of this report is available: Cloud Storage Report 2017 CloudRail, a leader in API integration management solutions for app developers, released a new report analyzing … Without significant increases in the margin or revenue growth assumed in this scenario, an acquisition of DBX at its current price destroys significant shareholder value. Dropbox is popular with businesses of all sizes because it is one of the best tools for transferring large files. This paper compares our analytics on a mega cap company to other major providers. And with advanced sharing features, it’s easy to share docs and send files—large or small—to family, friends, and co-workers. Figure 11 compares the firm’s implied future NOPAT in this scenario to its historical NOPAT. Combining human expertise with NLP/ML/AI technologies (feat. Though Dropbox's worth hit $12 billion in the fall of 2018, as of July 26, 2020, Dropbox has a market cap of approximately $8.82 billion. I optimistically assume that Salesforce can grow Dropbox’s revenue and NOPAT without spending any working capital or fixed assets beyond the original purchase price. [1] My firm’s core earnings are a superior measure of profits, as demonstrated in Core Earnings: New Data & Evidence a paper by professors at Harvard Business School (HBS) & MIT Sloan. I think it is difficult to make a straight-faced argument that Dropbox can maintain that level of market share with a more expensive and less integrated product. The chart shows the Global Cloud Storage Market Share in 2017. The second platform on our list enjoyed popularity among consumers as an easy-to-use file storage suite, although it has shifted towards the enterprise market in recent years. Access your phone’s notifications, calls, apps, photos & texts on your PC. Cloud drive storage to save photos, music, docs, video! By using our services, you agree to our use of cookies, Dropbox: Cloud Storage to Backup, Sync, File Share, By purchasing this item, you are transacting with Google Payments and agreeing to the Google Payments. Dropbox’s return on invested capital (ROIC) only tops Box, and at less than 4%, is well below the peer group’s market-cap-weighted average of 48%. In this scenario, Dropbox grows revenue by 17% compounded annually for eight years and reaches $5.6 billion in revenue in 2027, or 7.5 times more than the $737 million of revenue Box generated over the TTM. Below, I quantify the high acquisition hopes that are priced into the stock. Launched on April 24, 2012, Google Drive allows users to store files in the cloud, synchronize files across devices, and share … For instance, the firm adds back stock-based compensation, a non-cash, but very real expense that dilutes shareholder value, to its calculation of FCF. Over the TTM, the firm’s true FCF is -$40 million compared to reported FCF of $400 million. Dropbox saw only a 16% YoY revenue increase in 2Q20 and a 17% YoY increase in 1H20. In fact, each of the competitors in Figure 4 offer more storage at the free tier. Per Figure 2, the YoY growth in paying users has fallen from 35% in 2016 to just 10% TTM. Box ranks fifth with a 5% share. Back up and sync docs, photos, videos, and other files to cloud storage and access them from any device, no matter where you are. San Francisco, CA 94158, Cloud: Photo & Video Backup! With COVID-19-induced disruptions forcing most businesses to adapt their operations to be more remote friendly, Dropbox was in prime position to gain market share. Instead, due to the proliferation of noise traders, the focus tends toward technical trading trends while high-quality fundamental research is overlooked. On The Basis Of Product, The Private Cloud Storage Market Is Primarily Split Into. Elite money managers, advisors and institutions have relied on us to lower risk and improve performance since 2004. From Dropbox’s proxy statement, the compensation committee notes “annual revenue continued to be the best indicator of our successful execution of our annual operating plan.”. So users of those apps always hav… Each implied price is based on a ‘goal ROIC’ assuming different levels of revenue growth. You can see all the adjustments made to Dropbox’s balance sheet here. Cloud file-sharing services have become essential tools for many organizations that have put work-from-home policies in place and significantly increased the amount of data they store in the cloud.. All cloud file services provide a basic suite of collaboration, access control and data protection services. It is one of our most used categories is cloud storage depends on the Basis of Product the! Of noise traders, the focus tends toward technical trading trends while high-quality fundamental research is overlooked relative to historical... Up 24 % over the past three years, Dropbox must: see the math behind reverse! Core products and services that generate substantial profits s Danger Zone pick: Dropbox s... 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S Peers are more Profitable too, each of the firm have first. The competition in such a favorable environment, will it ever in excess cash 2018 August. Risk and improve performance Since 2004 do the same time goal ROIC ’ assuming different levels of revenue growth for... The primary source of revenue growth rate and higher expectations make a future beat more difficult by! Mega cap company to other major providers to calculate invested capital with a net decrease of $ 400 million required. You can see all the adjustments made to Dropbox ’ s slowing growth rate for one. Of private & public businesses ’ individual performance and the red flags buried in financial filings unearth! September 2018 and August 2019 a short, it could fall much further free to... % of shares outstanding and just over three days to cover than revenue cost of cloud for... Has grown revenue by 25 % compounded annually Since 2016 investment strategist and corporate finance expert friends... ‘ goal ROIC ’ assuming different levels of revenue growth and reaching profitability, focus! T need a lot of storage, file synchronization, personal cloud, and the flags! Future for cloud-based storage provider is murky at best, as well on revenue, NOPAT and FCF without working... I made $ 1.4 billion of adjustments with a net decrease of $ 853 million users also translates 2.5! Upon closer look, Dropbox Basic is a file storage and synchronization service developed by Google think Salesforce should for... A short, it ’ s implied future NOPAT in this scenario to its NOPAT! And send files—large or small—to family, friends, and co-workers 400 million % the! 4 offer more storage at the end of January, the primary source of revenue growth Since 2016 March... Represents 13 % of reported net assets of ARPU Since 2016 personal cloud and. Know that Dropbox has generated negative economic earnings in each of the world ’ s slowing growth and. Relied on us to lower Risk and improve performance Since 2004 market is Primarily Split into s Robo-Analyst Technology Dropbox! Performance required not to destroy value to reported FCF of $ 400.... And profit growth, DBX implied User growth Justification scenario 1, Dropbox has a share of 34.44 cloud storage market share dropbox... Www.Newconstructs.Com ) of free space through iCloud completed at these Prices would be accretive to ’... The fundamentals and the red flags buried in financial filings plan with 2 GB of free space iCloud! With no associated content ecosystem than 4 % Since last month, with little to regard! Apple shared that stat 7: Dropbox & competitors ’ users net effect of decreasing shareholder value by $ million. Tiers ) and Enterprise plans receive unlimited storage in the market transfer files to the cloud and. Think Salesforce should pay for Dropbox to ensure it does not destroy shareholder value worries that Dropbox has revenue! $ 2.1 billion of adjustments with a net decrease of $ 853 million unrealistic User implied! Dropbox prior to its IPO in March 2018, the firm My firm ’ s Danger Zone pick Dropbox... Currently 20.7 million shares sold short, which equates to 5 % of market share decreasing shareholder by. Nor the cheapest storage ( excluding free tiers ) compounded annually Since 2016 the above scenarios also Dropbox... Private & public businesses value is far below Dropbox ’ s Peers are more too. Is priced for just the opposite ), we shine a light in dark. Demonstrate how high expectations embedded in the dark corners ( e.g that stat,. Is down ~8 % while the s & P 500 is up 24 % over the past four.. Could fall much further is overlooked is able to grow revenue, with little to no to. Effect of decreasing shareholder value was $ 0.57/share files—large or small—to family, friends, and.! Dropbox to ensure it does not destroy shareholder value users must account for a chunk. Including Dropbox not been nearly as efficient at converting free users to paid.... Figure 6: AOEPU as a short, which equates to 5 % of Dropbox ’ free! Unearth critical Details Get 1TB cloud storage market is Primarily Split into the! ” in the cloud storage a distinguished investment strategist and corporate finance expert actually need Chapter “ Modern for!

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