See the math behind this reverse DCF scenario. Investors with fiduciary responsibilities should consider the deteriorating fundamentals, weak competitive position, and the unrealistic user growth implied by the current valuation. Dropbox lets anyone upload and transfer files to the cloud, and share them with anyone. Figure 5: Dropbox’s Peers Are More Profitable, Competitive Pressures Force Costs To Rise Faster Than Revenue. Dropbox has over 600 million registered users, but as of 2Q20, just 15 million (or 3% of registered users) were paying users. Each of the above scenarios also assumes Dropbox is able to grow revenue, NOPAT and FCF without increasing working capital or fixed assets. The most notable adjustment to shareholder value was $1 billion in excess cash. At the end of January, the consensus estimate for Dropbox’s 2020 earnings was $0.57/share. 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. Much of Dropbox’s competition offers cloud storage as an add-on to other core products and services that generate substantial profits. Google Drive is the next in line with 27.27% market share. 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. Entrenched competition is well-positioned to take more market share, but the stock is priced for just the opposite. More broadly, Axler worries that Dropbox has saturated its cloud-storage market. Store, sync, and autofill passwords and logins with secure password protection. 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… © 2020 Forbes Media LLC. Top Competitors Websites I use the higher estimates in scenario two to illustrate a best-case scenario where I assume Dropbox could grow revenue faster while being integrated within Salesforce’s existing business. This scenario represents the minimum level of performance required not to destroy value. New Constructs provides unrivaled insights into the fundamentals and valuation of private & public businesses. You can see all the adjustments made to Dropbox’s balance sheet here. Figure 4 shows that Dropbox offers neither the most storage nor the cheapest storage (excluding free tiers). Hardware Solution 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. 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. Because Google … Competitors, DBX Implied User Growth Justification Scenario 1, Dropbox Has Significant Downside With More Realistic User Growth. ... Dropbox is a file hosting service that offers cloud storage, file synchronization, personal cloud, and client software. [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. Should the firm have its first earnings miss, investors could get spooked and send shares lower. 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. 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. The combination of the firm’s slowing growth rate and higher expectations make a future beat more difficult. Its share price DBX is down ~8% while the S&P 500 is up 24% over the last year or so. Its 600 million users must account for a good chunk of the world’s knowledge workers, and now Dropbox is … 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. 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.”. While this stock has outperformed as a short, it could fall much further. 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). Dropbox stated in its 2Q20 earnings call that it is on a trajectory to achieve its long-term free cash flow target of $1 billion by 2024. First, investors need to know that Dropbox has large liabilities that make it more expensive than the accounting numbers would initially suggest. This adjustment represents 13% of Dropbox’s market cap. Combining human expertise with NLP/ML/AI technologies (feat. 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. Cloud storage isn’t just about uploading your files. In other words, executives are incentivized to focus on revenue, with little to no regard to the profitability of the firm. Critical Details Found in Financial Filings by My Firm’s Robo-Analyst Technology. Access and share your photos, docs, and more from anywhere for free. 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. 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. 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. The future for cloud-based storage provider Dropbox is murky at best, as competition is well-positioned to take more market 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. You may opt-out by. He was a 5-yr member of FASB's Investors Advisory Committee. 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 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. 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. 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. The other players boasting a double-digit usage share were Dropbox with 17%, Amazon Cloud Drive with 15% and Google Drive with 10%. It’s about sharing them, as well. Consensus estimates show that the market expects the firm’s revenue growth rate to decline from 14% in 2020 to just 10% in 2022. MEGA is Cloud Storage with Powerful Always-On Privacy. Dropbox’s invested capital turns, a measure of balance sheet efficiency, ranks third out of the six companies listed in Figure 5. Access your phone’s notifications, calls, apps, photos & texts on your PC. Paper is a collaborative workspace that helps teams create and share early ideas. Since I first placed it in the Danger Zone, DBX is down ~8% while the S&P 500 is up 24%. Dropbox, Inc. All Rights Reserved, This is a BETA experience. Opinions expressed by Forbes Contributors are their own. Elite money managers, advisors and institutions have relied on us to lower risk and improve performance since 2004. Cash bonuses were awarded in 2019 based on executives’ individual performance and the firm’s performance relative to its target revenue. Over the past three years the firm has incurred $1.1 billion in stock-based compensation expense. 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. Figures 12 and 13 show what I think Salesforce should pay for Dropbox to ensure it does not destroy shareholder value. Dropbox has beaten earnings in each of the past ten quarters. Dropbox market share in the Datanyze Universe. Dropbox lets anyone upload and transfer files to the cloud, and share them with anyone. Per Figure 8, Dropbox has grown revenue by 25% compounded annually since 2016. 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. He is author of the Chapter “Modern Tools for Valuation” in The Valuation Handbook (Wiley Finance 2010). By comparison, Google Cloud’s revenue increased 43% YoY in 2Q20, and Microsoft grew its commercial cloud revenue by 39% YoY over the same period. 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. Dropbox, Inc. write a review. Here’s a quick summary for noise traders when analyzing DBX: Executive Compensation Plan Is Not Creating Shareholder Value, In addition to base salaries, Dropbox’s executives earn cash bonuses and long-term equity incentive compensation. Memory clean, files safe, Get 1TB Cloud Storage for FREE. 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. 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. 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