And with advanced sharing features, it’s easy to share docs and send files—large or small—to family, friends, and co-workers. Instead, due to the proliferation of noise traders, the focus tends toward technical trading trends while high-quality fundamental research is overlooked. 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. 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. Consensus estimates show that the market expects the firm’s revenue growth rate to decline from 14% in 2020 to just 10% in 2022. One of the most notable adjustments was $20 million in operating leases. While core earnings[1] fell from -$58 million in 2018 to -$67 million in 2019, they rose to $17 million over the TTM. See the math behind this reverse DCF scenario. Figure 7 shows that while the firm’s reported FCF is trending up, Dropbox’s true FCF is moving in the opposite direction. 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. After adjusting for all liabilities, I can model multiple purchase price scenarios. In the first scenario, I use 14% revenue growth in year one and 11% in years two through five (vs. consensus estimates of 14% in 2020 and 11% in 2021). The Appendix details exactly how we stack up. Software Solution. Back up and sync docs, photos, videos, and other files to cloud storage and access them from any device, no matter where you are. Memory clean, files safe, Get 1TB Cloud Storage for FREE. 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. At the end of January, the consensus estimate for Dropbox’s 2020 earnings was $0.57/share. 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. No other competitors claimed more than 4% of the field. Fiduciaries should avoid this week’s Danger Zone pick: Dropbox Inc. (DBX). You can see all the adjustments made to Dropbox’s income statement here. Figure 1: Dropbox’s YoY Revenue Growth Since 2016. Per Figure 8, Dropbox has grown revenue by 25% compounded annually since 2016. With our CloudRail API Integration Solution we help developers to connect to various APIs much faster. Dropbox (DBX) is a pioneer of cloud storage. Launched on April 24, 2012, Google Drive allows users to store files in the cloud, synchronize files across devices, and share … David is CEO of New Constructs (www.newconstructs.com). Dropbox lets anyone upload and transfer files to the cloud, and share them with anyone. 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. Figure 12 shows the implied values for DBX assuming Salesforce wants to achieve an ROIC on the acquisition that equals its WACC of 6%. 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. You may opt-out by. Each implied price is based on a ‘goal ROIC’ assuming different levels of revenue growth. 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. The most notable adjustment to shareholder value was $1 billion in excess cash. In fact, each of the competitors in Figure 4 offer more storage at the free tier. WebDrive has a share of 13.13% in the market. 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. 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. 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%. Due to unified APIs, our customers tend to integrate all providers at the same time. Dropbox, Inc. write a review. The number of shares sold short has increased by 4% since last month. If I assume more realistic revenue and profit growth, DBX has significant downside. 1800 Owens St Dropbox, a pioneer among cloud storage and syncing services, offers synced desktop folders for anywhere-access.Though it's comparatively pricey, unique tools like … Dropbox is at a disadvantage when it comes to competing for its competitors’ users. Cloud storage isn’t just about uploading your files. This WFH Solution Provider Saw Market Share Decline During COVID. 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. This scenario represents the minimum level of performance required not to destroy value. If Dropbox cannot outgrow the competition in such a favorable environment, will it ever? Dropbox saw only a 16% YoY revenue increase in 2Q20 and a 17% YoY increase in 1H20. Competitors, DBX Implied User Growth Justification Scenario 1, Dropbox Has Significant Downside With More Realistic User Growth. Dropbox’s paying users, the primary source of revenue, are growing much more slowly too. Back up and sync docs, photos, videos, and other files to cloud storage and access them from any device, no matter where you are. Most of Dropbox’s competition is more profitable too. 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. Figure 13: Implied Acquisition Prices to Create Value. $8.82 billion Dropbox's valuation, as of July 2020 TOP COMPETITORS OF Dropbox IN Datanyze Universe . 2. 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. 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’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%. One of our most used categories is Cloud Storage. And with advanced sharing features, it’s easy to share docs and send files—large or small—to family, friends, and co-workers. 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. footnotes) of hundreds of thousands of financial filings to unearth critical details. The following are the data based on 48,262 companies that use file hosting services of various companies, including Dropbox. Microsoft one drive is at 12.12%. Dropbox’s net operating profit after-tax (NOPAT) margin of 2% is well below the market-cap-weighted peer group average margin of 21%. Leading media outlets regularly feature our research. He is author of the Chapter “Modern Tools for Valuation” in The Valuation Handbook (Wiley Finance 2010). Its 600 million users must account for a good chunk of the world’s knowledge workers, and now Dropbox is … He was a 5-yr member of FASB's Investors Advisory Committee. The future for cloud-based storage provider Dropbox is murky at best, as competition is well-positioned to take more market share. Even in this best-case growth scenario, the implied value is far below Dropbox’s current price. Dropbox has generated negative economic earnings in each of the past four years. Critical Details Found in Financial Filings by My Firm’s Robo-Analyst Technology. 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 … 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. Dropbox has a share of 34.44% in the online file hosting industry. 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. Over the TTM, the firm’s true FCF is -$40 million compared to reported FCF of $400 million. © 2020 Forbes Media LLC. Access your phoneâs notifications, calls, apps, photos & texts on your PC. Figure 8: Dropbox’s Revenue and Core Earnings Since 2016, Dropbox Is Priced to Reach 44 Million Paying Users or 30% of Amazon Prime Members. Over the past three years, Dropbox states it generated $1.3 billion in free cash flow (FCF). 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. This paper compares our analytics on a mega cap company to other major providers. While this stock has outperformed as a short, it could fall much further. 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). While I chose Salesforce, analysts can use just about any company to do the same analysis. Figure 11: DBX Has Large Downside Risk: DCF Valuation Scenario. Over the past three years the firm has incurred $1.1 billion in stock-based compensation expense. Google Drive is a file storage and synchronization service developed by Google. This assumption is highly unlikely but allows us to create best-case scenarios that demonstrate how high expectations embedded in the current valuation are. Dropbox has over 600 million registered users, but as of 2Q20, just 15 million (or 3% of registered users) were paying users. On The Basis Of Product, The Private Cloud Storage Market Is Primarily Split Into. Dropbox has beaten earnings in each of the past ten quarters. 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. 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