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. 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. This peer group includes Apple, Microsoft, Alphabet, Amazon, and Box. 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%. The following are the data based on 48,262 companies that use file hosting services of various companies, including Dropbox. See our client testimonials. Because Google … While core earnings[1] fell from -$58 million in 2018 to -$67 million in 2019, they rose to $17 million over the TTM. Figure 11 compares the firm’s implied future NOPAT in this scenario to its historical NOPAT. 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. [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. 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. WebDrive has a share of 13.13% in the market. The future for cloud-based storage provider Dropbox is murky at best, as competition is well-positioned to take more market share. 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. On the contrary, it is losing ground to the competition. This paper compares our analytics on a mega cap company to other major providers. 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. 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 A newer version of this report is available: Cloud Storage Report 2017 CloudRail, a leader in API integration management solutions for app developers, released a new report analyzing … Figures 12 and 13 show what I think Salesforce should pay for Dropbox to ensure it does not destroy shareholder value. 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. New Constructs provides unrivaled insights into the fundamentals and valuation of private & public businesses. Figure 4 shows that Dropbox offers neither the most storage nor the cheapest storage (excluding free tiers). Once you’ve downloaded the Dropbox app on your computer, simply drag and drop the files you’d like to back up into the Dropbox folder on your desktop. In other words, executives are incentivized to focus on revenue, with little to no regard to the profitability of the firm. 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. While this stock has outperformed as a short, it could fall much further. The cloud storage market size is valued at $46.25 billion in 2019 and is expected to reach $222.5 billion by 2027, with a CAGR of 21% from 2020 to 2025. Dropbox, Inc. At the end of January, the consensus estimate for Dropbox’s 2020 earnings was $0.57/share. 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. 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. Per Figure 2, the YoY growth in paying users has fallen from 35% in 2016 to just 10% TTM. 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… No other competitors claimed more than 4% of the field. Dropbox differentiated itself from Box by focusing on mass-market cloud storage while Box concentrated on helping businesses. True FCF. Google Drive is the next in line with 27.27% market share. Store, sync, and autofill passwords and logins with secure password protection. 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. This adjustment represented 1% of reported net assets. All Rights Reserved, This is a BETA experience. Figure 13 shows the implied values for DBX assuming Salesforce wants to achieve an ROIC on the acquisition that equals 8% and is greater than its WACC. 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 market share in the Datanyze Universe. Dropbox is popular with businesses of all sizes because it is one of the best tools for transferring large files. Further, Dropbox’s relative underperformance to its stronger peers during the COVID-19 disruptions could cause investors to wake up to the fact that Dropbox is losing market share and cause them to rotate their money into better investments. Figure 10: Dropbox’s Implied 2027 Average Paying Users vs. Dropbox’s paying users, the primary source of revenue, are growing much more slowly too. Software Solution. © 2020 Forbes Media LLC. MEGA is Cloud Storage with Powerful Always-On Privacy. 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. 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, Inc. write a review. Memory clean, files safe, Get 1TB Cloud Storage for FREE. Below, I quantify the high acquisition hopes that are priced into the stock. 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. I first warned about Dropbox prior to its IPO in March 2018, and again in September 2018 and August 2019. Each implied price is based on a ‘goal ROIC’ assuming different levels of revenue growth. While I chose Salesforce, analysts can use just about any company to do the same analysis. 1800 Owens St With our CloudRail API Integration Solution we help developers to connect to various APIs much faster. 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%). 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. For instance, Apple offers all of its customers 5 GB of free space through iCloud. 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. Its 600 million users must account for a good chunk of the world’s knowledge workers, and now Dropbox is … 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. So users of those apps always hav… Dropbox has beaten earnings in each of the past ten quarters. Dropbox has a share of 34.44% in the online file hosting industry. Entrenched competition is well-positioned to take more market share, but the stock is priced for just the opposite. For those who don’t need a lot of storage, Dropbox Basic is a free plan with 2 GB of storage. 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. 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 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. Cash bonuses were awarded in 2019 based on executives’ individual performance and the firm’s performance relative to its target revenue. TOP COMPETITORS OF Dropbox IN Datanyze Universe . Avoid losses from using other firms’ data: “…many of the income-statement-relevant quantitative disclosures collected by NC do not appear to be easily identifiable in Compustat…” – page 13, “Core Earnings [calculated using New Constructs’ novel dataset] provides predictive power for various measures of one-year-ahead performance…that is incremental to their current-period counterparts.” – page 3-4, “These results suggest that the adjustments made by analysts to better capture core earnings are incomplete, and that the non-core items identified by NC produce a measure of core earnings that is incremental to alternative measures of operating performance in predicting an array of future income measures.”  – page 26, “An appropriate measure of accounting performance for purposes of forecasting future performance requires detailed analysis of all quantitative performance disclosures detailed in the annual report, including those reported only in the footnotes and in the MD&A.” – page 31. 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