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. See the math behind this reverse DCF scenario. 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. 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. Despite years of rapid revenue growth and reaching profitability, the future for this cloud-based storage provider is murky at best. Dropbox hits 17% of market share with no associated content ecosystem. While I chose Salesforce, analysts can use just about any company to do the same analysis. Figure 9: Current Valuation Implies Unrealistic Revenue Growth, DBX Implied Revenue Justification Scenario 1, Dropbox’s Average Paying Users Need to More Than Triple to Justify Valuation. Dropbox (DBX) is a pioneer of cloud storage. See all adjustments to Dropbox’s valuation here. Back up and sync docs, photos, videos, and other files to cloud storage and access them from any device, no matter where you are. Catalyst – Slowing Revenue Growth With Increased Expectations. By dividing the implied revenue in 2027 of $5.6 billion by the firm’s 2Q20 ARPU of $126, I arrive at ~44 million implied paying users in 2027. Dropbox’s invested capital turns, a measure of balance sheet efficiency, ranks third out of the six companies listed in Figure 5. In other words, executives are incentivized to focus on revenue, with little to no regard to the profitability of the firm. 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. 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. To justify its current price of $19/share, Dropbox must: See the math behind this reverse DCF scenario. 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%. And with advanced sharing features, itâs easy to share docs and send filesâlarge or smallâto family, friends, and co-workers. Figure 10: Dropbox’s Implied 2027 Average Paying Users vs. 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. Dropbox makes moving between personal, business, and enterprise-level plans easy by transferring your account to the new plan without changing file configurations.Google Drive for Business plans start at 30GB of storage per user at the Basic level, while Business and Enterprise plans give users unlimited storage with some extra features. 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. First, investors need to know that Dropbox has large liabilities that make it more expensive than the accounting numbers would initially suggest. For this report we had a deeper look at all apps on either Android or iOS which integrate at least Dropbox, Google Drive, OneDrive and Box via the CloudRail solution. 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. For those who don’t need a lot of storage, Dropbox Basic is a free plan with 2 GB of storage. WebDrive has a share of 13.13% in the market. It is also worth noting that the revenue growth expectations embedded in the current valuation of DBX are meaningfully higher than consensus analyst expectations of 14% in 2020, which drop to 10% in 2022. 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… For instance, Apple offers all of its customers 5 GB of free space through iCloud. 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. Dropbox cloud storage offers a range of plans that uniquely meet personal, small and large business plan needs – from 2 TB to unlimited space. Even in this best-case growth scenario, the implied value is far below Dropbox’s current price. Dropbox is popular with businesses of all sizes because it is one of the best tools for transferring large files. Dropbox controls 21% of the cloud storage market, according to Datanyze, putting it in second place behind Google Drive (34%) and ahead of OneDrive (12%). 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. The report also revealed that cloud storage is overwhelmingly dominated by music, with about 90 percent of Apple, Amazon and Google cloud users storing music in the cloud. Dropbox lets anyone upload and transfer files to the cloud, and share them with anyone. Dropbox market share in the Datanyze Universe. Back UP your Photos & Videos Automatically!â»ï¸. Furthermore, each of these users may find Apple’s new Apple One subscription (which bundles iCloud, Music, TV, Arcade, Fitness, and News) more appealing than a third-party service. 2. He is author of the Chapter “Modern Tools for Valuation” in The Valuation Handbook (Wiley Finance 2010). Access your phoneâs notifications, calls, apps, photos & texts on your PC. Because Dropbox started as a small company, freemium provided a way for more people to try the product and thus enabled people to experience the superior services, therefore expanded their market share. The key variables are the weighted average cost of capital (WACC) and ROIC for assessing different hurdle rates for a deal to create value. 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%. 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. See what HBS & MIT Sloan professors say in the paper: “…the NC dataset provides a novel opportunity to study the properties of non-operating items disclosed in 10-Ks, and to examine the extent to which the market impounds their implications.” – page 19, “Trading strategies that exploit cross-sectional differences in firms’ transitory earnings produce abnormal returns of 7-to-10% per year.” – page 1. Figure 5: Dropbox’s Peers Are More Profitable, Competitive Pressures Force Costs To Rise Faster Than Revenue. Jump forward to today, and the 2020 consensus estimate has risen to $0.77/share, despite underwhelming user growth during the shift to work-from-home. 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. 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. Less than its current price of $ 19/share, Dropbox must make money on cloud storage as an to... Money while Dropbox must: see the math behind this reverse DCF scenario 1 % of the.. And a 17 % YoY increase in 2Q20 and a 17 % the... In free cash flow fails to reflect the true economics of the ’! Other words, executives are incentivized to focus on revenue, NOPAT FCF... Optimistic of scenarios, Dropbox states it generated $ 1.3 billion in stock-based compensation expense access your phoneâs notifications calls! 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