You can see all the adjustments made to Dropbox’s income statement here. Figure 12 shows the implied values for DBX assuming Salesforce wants to achieve an ROIC on the acquisition that equals its WACC of 6%. San Francisco, CA 94158, Cloud: Photo & Video Backup! 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. The following are the data based on 48,262 companies that use file hosting services of various companies, including Dropbox. Competitors, DBX Implied User Growth Justification Scenario 1, Dropbox Has Significant Downside With More Realistic User Growth. Microsoft one drive is at 12.12%. Over the past three years the firm has incurred $1.1 billion in stock-based compensation expense. In other words, executives are incentivized to focus on revenue, with little to no regard to the profitability of the firm. For example, Google’s G Suite (which includes Google Drive) has 2 billion active users and Apple has 1.5 billion active devices (which include iCloud). On the contrary, it is losing ground to the competition. 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. Store, sync, and autofill passwords and logins with secure password protection. Dropbox hits 17% of market share with no associated content ecosystem. If Dropbox cannot outgrow the competition in such a favorable environment, will it ever? 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%). Despite facing larger and more entrenched competition, Dropbox is priced as if it will quickly improve profitability while also increasing its average paying users to equal 30% of Amazon’s Prime members. If I assume more realistic revenue and profit growth, DBX has significant downside. Google Drive is a file storage and synchronization service developed by Google. 2. Growing registered and paying users is a serious uphill battle for Dropbox since most of its potential paying users are already customers of firms that provide the same service as Dropbox along with many other important services. And with advanced sharing features, it’s easy to share docs and send files—large or small—to family, friends, and co-workers. THE CLOUD STORAGE WARS: APPLE LEADS WITH 27% MARKET SHARE. At the end of January, the consensus estimate for Dropbox’s 2020 earnings was $0.57/share. Even though Dropbox faces more competition, the firm has successfully increased its average revenue per paying user (ARPU) from $111 in 2016 to $123 in 2019, or 3.6% compounded annually. 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. 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. Balance Sheet: I made $1.4 billion of adjustments to calculate invested capital with a net decrease of $853 million. The cost of cloud storage depends on the amount of space you actually need. For instance, Apple offers all of its customers 5 GB of free space through iCloud. 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. In the second scenario, the estimated revenue growth rate for year one is 14% in years one through five. Dropbox lets anyone upload and transfer files to the cloud, and share them with anyone. New Constructs provides unrivaled insights into the fundamentals and valuation of private & public businesses. 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. 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. 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. 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. Entrenched competition is well-positioned to take more market share, but the stock is priced for just the opposite. After adjusting for all liabilities, I can model multiple purchase price scenarios. 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. Figure 13: Implied Acquisition Prices to Create Value. Over the past three years, Dropbox states it generated $1.3 billion in free cash flow (FCF). This peer group includes Apple, Microsoft, Alphabet, Amazon, and Box. Dropbox’s invested capital turns, a measure of balance sheet efficiency, ranks third out of the six companies listed in Figure 5. ... Dropbox is a file hosting service that offers cloud storage, file synchronization, personal cloud, and client software. 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. 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. 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. 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. Dropbox lets anyone upload and transfer files to the cloud, and share them with anyone. Having to charge users for services they can get free from competitors with whom they’ve already integrated puts Dropbox in a very poor competitive position. Below, I quantify the high acquisition hopes that are priced into the stock. Dropbox Business starts at 2TB of storage for the Standard plan, but Advanced and Enterprise plans receive unlimited storage in the cloud. Cash bonuses were awarded in 2019 based on executives’ individual performance and the firm’s performance relative to its target revenue. 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. Each of the above scenarios also assumes Dropbox is able to grow revenue, NOPAT and FCF without increasing working capital or fixed assets. The future for cloud-based storage provider Dropbox is murky at best, as competition is well-positioned to take more market share. Meanwhile, Box (BOX), a direct competitor, had ~13 million paying users out of just 71 million registered users, or 18%, as of 2Q20. Even in the most optimistic of scenarios, Dropbox is worth less than its current share price. Box ranks fifth with a 5% share. 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. Leading media outlets regularly feature our research. 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%. No other competitors claimed more than 4% of the field. This WFH Solution Provider Saw Market Share Decline During COVID. Figures 12 and 13 show what I think Salesforce should pay for Dropbox to ensure it does not destroy shareholder value. Software Solution. 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.”. True FCF. David is CEO of New Constructs (www.newconstructs.com). Figure 4 shows that Dropbox offers neither the most storage nor the cheapest storage (excluding free tiers). 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. 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%). 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. 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%. Figure 12: Implied Acquisition Prices for Value-Neutral Deal. While this stock has outperformed as a short, it could fall much further. Top Competitors Websites In fact, each of the competitors in Figure 4 offer more storage at the free tier. 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. 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. This paper compares our analytics on a mega cap company to other major providers. Given the analysis above, the only plausible justification for DBX trading at such a high price is the expectation that another firm will buy it. 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). 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. The paper empirically shows that my firm’s data is superior to “Operating Income After Depreciation” and “Income Before Special Items” from Compustat, owned by S&P Global (SPGI). Sharing. Figure 1: Dropbox’s YoY Revenue Growth Since 2016. Dropbox saw only a 16% YoY revenue increase in 2Q20 and a 17% YoY increase in 1H20. The other players boasting a double-digit usage share were Dropbox with 17%, Amazon Cloud Drive with 15% and Google Drive with 10%. For those who don’t need a lot of storage, Dropbox Basic is a free plan with 2 GB of storage. Storage WARS: Apple LEADS with 27 % market share a 16 % YoY in. 2019 based on executives ’ individual performance and the unrealistic User growth implied by the current valuation compensation expense 2019... Represents 13 % of shares outstanding and just over three days to cover share price Dropbox... Deteriorating fundamentals, weak competitive position, and now Dropbox is … 2 a! 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