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If I assume more realistic revenue and profit growth, DBX has significant downside. 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. 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. Google Drive is a file storage and synchronization service developed by Google. 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.”. 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. Figures 12 and 13 show what I think Salesforce should pay for Dropbox to ensure it does not destroy shareholder value. In other words, executives are incentivized to focus on revenue, with little to no regard to the profitability of the firm. 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. Valuation: I made $2.1 billion of adjustments with a net effect of decreasing shareholder value by $90 million. Because Google … Dropbox has beaten earnings in each of the past ten quarters. The future for cloud-based storage provider Dropbox is murky at best, as competition is well-positioned to take more market share. 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). Top Leading Companies of Global Private Cloud Storage Market are Amazon Cloud Drive, Ubuntu One, Apple iCloud, Dropbox, Google Drive, Box, Microsoft SkyDrive, MediaFire, SpiderOak, Mega and others. Combining human expertise with NLP/ML/AI technologies (feat. Over the past three years the firm has incurred $1.1 billion in stock-based compensation expense. One of the most notable adjustments was $20 million in operating leases. Despite years of rapid revenue growth and reaching profitability, the future for this cloud-based storage provider is murky at best. 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. It’s about sharing them, as well. 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. Back up and sync docs, photos, videos, and other files to cloud storage and access them from any device, no matter where you are. Below, I quantify the high acquisition hopes that are priced into the stock. The Appendix details exactly how we stack up. Instead, due to the proliferation of noise traders, the focus tends toward technical trading trends while high-quality fundamental research is overlooked. Dropbox is one of the biggest names in cloud storage.But as with any other industry, there are competitors chipping away at its market share.Read on to learn more about Dropbox … Sharing. 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. Even if Dropbox can grow revenue by 14% compounded annually for five years and achieve a 4% NOPAT margin, the firm is worth less than $19/share. Paper is a collaborative workspace that helps teams create and share early ideas. This WFH Solution Provider Saw Market Share Decline During COVID. 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. And with advanced sharing features, it’s easy to share docs and send files—large or small—to family, friends, and co-workers. Consequently, these firms can offer cloud storage for free and still make plenty of money while Dropbox must make money on cloud storage. To justify its current price of $19/share, Dropbox must: See the math behind this reverse DCF scenario. 20% of iCloud customers were paying users in 2018, the last time Apple shared that stat. Below are specifics on the adjustments I make based on Robo-Analyst findings in Dropbox’s 10-Qs and 10-K: Income Statement: I made $67 million of adjustments, with a net effect of removing $9 million in non-operating expenses (1% of revenue). Most of Dropbox’s competition is more profitable too. The COVID-19 pandemic has significantly changed how organizations work. For those who don’t need a lot of storage, Dropbox Basic is a free plan with 2 GB of storage. On The Basis Of Product, The Private Cloud Storage Market Is Primarily Split Into. Figure 10: Dropbox’s Implied 2027 Average Paying Users vs. 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. 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. Software Solution. Launched on April 24, 2012, Google Drive allows users to store files in the cloud, synchronize files across devices, and share … Access and share your photos, docs, and more from anywhere for free. Dropbox is at a disadvantage when it comes to competing for its competitors’ users. 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. In fact, each of the competitors in Figure 4 offer more storage at the free tier. Dropbox’s invested capital turns, a measure of balance sheet efficiency, ranks third out of the six companies listed in Figure 5. And with advanced sharing features, it’s easy to share docs and send files—large or small—to family, friends, and co-workers. 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. Competitors, DBX Implied User Growth Justification Scenario 1, Dropbox Has Significant Downside With More Realistic User Growth. Combining human expertise with NLP/ML/AI technologies (featured by Harvard Business School), we shine a light in the dark corners (e.g. The number of shares sold short has increased by 4% since last month. ... Dropbox is a file hosting service that offers cloud storage, file synchronization, personal cloud, and client software. Each of the above scenarios also assumes Dropbox is able to grow revenue, NOPAT and FCF without increasing working capital or fixed assets. The leading region in the Cloud Storage Industry was North America with a 42% cloud storage market share in 2017, followed by Europe with 28% cloud storage market share, Asia-Pacific with 25%, and the rest of the world with 5%. If Dropbox cannot outgrow the competition in such a favorable environment, will it ever? Dropbox lets anyone upload and transfer files to the cloud, and share them with anyone. Leading media outlets regularly feature our research. See the math behind this reverse DCF scenario. Over half of Americans online have never used cloud storage service Over the past three years, Dropbox states it generated $1.3 billion in free cash flow (FCF). Per Figure 8, Dropbox has grown revenue by 25% compounded annually since 2016. Dropbox’s net operating profit after-tax (NOPAT) margin of 2% is well below the market-cap-weighted peer group average margin of 21%. Catalyst – Slowing Revenue Growth With Increased Expectations. 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). There are currently 20.7 million shares sold short, which equates to 5% of shares outstanding and just over three days to cover. 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. He is author of the Chapter “Modern Tools for Valuation” in The Valuation Handbook (Wiley Finance 2010). Since I first placed it in the Danger Zone, DBX is down ~8% while the S&P 500 is up 24%. 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 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. © 2020 Forbes Media LLC. Opinions expressed by Forbes Contributors are their own. The key variables are the weighted average cost of capital (WACC) and ROIC for assessing different hurdle rates for a deal to create value. While I chose Salesforce, analysts can use just about any company to do the same analysis. David is a distinguished investment strategist and corporate finance expert. Dropbox differentiated itself from Box by focusing on mass-market cloud storage while Box concentrated on helping businesses. All Rights Reserved, This is a BETA experience. In the second scenario, the estimated revenue growth rate for year one is 14% in years one through five. After adjusting for all liabilities, I can model multiple purchase price scenarios. 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. 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. 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%. Dropbox is popular with businesses of all sizes because it is one of the best tools for transferring large files. Of 34.44 % in years one through five sharing features, it’s easy to share docs and files—large. In 2Q20 and a 17 % of reported net assets not destroy shareholder value the Global storage... Expectations make a future beat more difficult assuming different levels of revenue growth 2016! Your PC service that offers cloud storage WARS: Apple LEADS with %! This cloud-based storage provider is murky at best storage and synchronization service developed by Google capital or fixed assets years. 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