Dropbox saw only a 16% YoY revenue increase in 2Q20 and a 17% YoY increase in 1H20. New Constructs provides unrivaled insights into the fundamentals and valuation of private & public businesses. 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. Its 600 million users must account for a good chunk of the world’s knowledge workers, and now Dropbox is … 1800 Owens St Cloud storage isn’t just about uploading your files. Figure 11: DBX Has Large Downside Risk: DCF Valuation Scenario. WebDrive has a share of 13.13% in the market. 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. 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. Consensus estimates show that the market expects the firm’s revenue growth rate to decline from 14% in 2020 to just 10% in 2022. 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. 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. Figure 1: Dropbox’s YoY Revenue Growth Since 2016. It’s about sharing them, as well. Balance Sheet: I made $1.4 billion of adjustments to calculate invested capital with a net decrease of $853 million. On The Basis Of Product, The Private Cloud Storage Market Is Primarily Split Into. I think potential acquirers would be better off leaving cloud storage to the firms that can offer cloud storage as a free add-on to their deeply integrated services, but stranger things have happened than firms being acquired at unnecessarily high premiums to their intrinsic value. 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. Dropbox should link executive compensation with improving ROIC, which is directly correlated with creating shareholder value, so shareholders’ interests are properly aligned with executives’. Hardware Solution There are currently 20.7 million shares sold short, which equates to 5% of shares outstanding and just over three days to cover. Back up and sync docs, photos, videos, and other files to cloud storage and access them from any device, no matter where you are. On the contrary, it is losing ground to the competition. Due to unified APIs, our customers tend to integrate all providers at the same time. 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. 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. Dropbox has a share of 34.44% in the online file hosting industry. 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. © 2020 Forbes Media LLC. Fiduciaries should avoid this week’s Danger Zone pick: Dropbox Inc. (DBX). 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. 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. 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. See the math behind this reverse DCF scenario. Dropbox’s net operating profit after-tax (NOPAT) margin of 2% is well below the market-cap-weighted peer group average margin of 21%. Combining human expertise with NLP/ML/AI technologies (featured by Harvard Business School), we shine a light in the dark corners (e.g. The COVID-19 pandemic has significantly changed how organizations work. Per Figure 8, Dropbox has grown revenue by 25% compounded annually since 2016. 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 Business starts at 2TB of storage for the Standard plan, but Advanced and Enterprise plans receive unlimited storage in the cloud. 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. You can see all the adjustments made to Dropbox’s balance sheet here. 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. 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. Valuation: I made $2.1 billion of adjustments with a net effect of decreasing shareholder value by $90 million. 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 lets anyone upload and transfer files to the cloud, and share them with anyone. After adjusting for all liabilities, I can model multiple purchase price scenarios. 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. 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. 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. 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). So users of those apps always hav… 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. Even in this best-case growth scenario, the implied value is far below Dropbox’s current price. If Dropbox cannot outgrow the competition in such a favorable environment, will it ever? Sharing. 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 … One of our most used categories is Cloud Storage. This paper compares our analytics on a mega cap company to other major providers. Figure 4: Dropbox & Competitors’ Cloud-Based Storage Plans, Most of Dropbox’s Peers Are More Profitable Too. Meanwhile, Box (BOX), a direct competitor, had ~13 million paying users out of just 71 million registered users, or 18%, as of 2Q20. Paper is a collaborative workspace that helps teams create and share early ideas. Figure 4 shows that Dropbox offers neither the most storage nor the cheapest storage (excluding free tiers). All Rights Reserved, This is a BETA experience. More broadly, Axler worries that Dropbox has saturated its cloud-storage market. The most notable adjustment to shareholder value was $1 billion in excess cash. 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. At the end of January, the consensus estimate for Dropbox’s 2020 earnings was $0.57/share. This scenario represents the minimum level of performance required not to destroy value. And with advanced sharing features, it’s easy to share docs and send files—large or small—to family, friends, and co-workers. Opinions expressed by Forbes Contributors are their own. The other players boasting a double-digit usage share were Dropbox with 17%, Amazon Cloud Drive with 15% and Google Drive with 10%. One of the most notable adjustments was $20 million in operating leases. San Francisco, CA 94158, Cloud: Photo & Video Backup! 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. Its share price DBX is down ~8% while the S&P 500 is up 24% over the last year or so. This assumption is highly unlikely but allows us to create best-case scenarios that demonstrate how high expectations embedded in the current valuation are. Figure 11 compares the firm’s implied future NOPAT in this scenario to its historical NOPAT. Should the firm have its first earnings miss, investors could get spooked and send shares lower. 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. Catalyst – Slowing Revenue Growth With Increased Expectations. Dropbox has over 600 million registered users, but as of 2Q20, just 15 million (or 3% of registered users) were paying users. 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.”. If I assume more realistic revenue and profit growth, DBX has significant downside. 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. Critical Details Found in Financial Filings by My Firm’s Robo-Analyst Technology. Dropbox’s invested capital turns, a measure of balance sheet efficiency, ranks third out of the six companies listed in Figure 5. footnotes) of hundreds of thousands of financial filings to unearth critical details. THE CLOUD STORAGE WARS: APPLE LEADS WITH 27% MARKET SHARE. As investors focus more on fundamental research, research automation technology is needed to analyze all the critical financial details in financial filings as shown in the Harvard Business School and MIT Sloan paper, “Core Earnings: New Data and Evidence”. Dropbox (DBX) is a pioneer of cloud storage. 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. 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. This adjustment represents 13% of Dropbox’s market cap. Per Figure 2, the YoY growth in paying users has fallen from 35% in 2016 to just 10% TTM. 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. TOP COMPETITORS OF Dropbox IN Datanyze Universe . 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 … Elite money managers, advisors and institutions have relied on us to lower risk and improve performance since 2004. And with advanced sharing features, it’s easy to share docs and send files—large or small—to family, friends, and co-workers. 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. 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 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. Google Drive is the next in line with 27.27% market share. 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. Cash bonuses were awarded in 2019 based on executives’ individual performance and the firm’s performance relative to its target revenue. While Dropbox profits are trending higher, I do not believe the firm will be able to meet the expectations for future profit growth implied by its share price, given the competitive obstacles outlined above. 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%. 20% of iCloud customers were paying users in 2018, the last time Apple shared that stat. New Constructs provides unrivaled insights into the fundamentals and valuation of private & public businesses. Figure 13: Implied Acquisition Prices to Create Value. Box ranks fifth with a 5% share. Back up and sync docs, photos, videos, and other files to cloud storage and access them from any device, no matter where you are. 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. Dropbox lets anyone upload and transfer files to the cloud, and share them with anyone. Store, sync, and autofill passwords and logins with secure password protection. 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%). The key variables are the weighted average cost of capital (WACC) and ROIC for assessing different hurdle rates for a deal to create value. No other competitors claimed more than 4% of the field. Software Solution. 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 years of rapid revenue growth and reaching profitability, the future for this cloud-based storage provider is murky at best. Combining human expertise with NLP/ML/AI technologies (feat. 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. Instead, due to the proliferation of noise traders, the focus tends toward technical trading trends while high-quality fundamental research is overlooked. Dropbox hits 17% of market share with no associated content ecosystem. This peer group includes Apple, Microsoft, Alphabet, Amazon, and Box. Top Competitors Websites 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. Dropbox, Inc. write a review. 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. Decline of Dropbox . 2. See all adjustments to Dropbox’s valuation here. ... Dropbox is a file hosting service that offers cloud storage, file synchronization, personal cloud, and client software. The Appendix details exactly how we stack up. 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). 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. 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. However, upon closer look, Dropbox’s free cash flow fails to reflect the true economics of the business. Figure 2: Dropbox’s YoY Change in Paying Users Since 2016, Dropbox Has to Steal Users From Deeply Integrated Solution Providers. Most of Dropbox’s competition is more profitable too. Over half of Americans online have never used cloud storage service The combination of the firm’s slowing growth rate and higher expectations make a future beat more difficult. The chart shows the Global Cloud Storage Market Share in 2017. $8.82 billion Dropbox's valuation, as of July 2020 These days, fewer investors pay attention to fundamentals and the red flags buried in financial filings. For instance, Apple offers all of its customers 5 GB of free space through iCloud. Dropbox cloud storage offers a range of plans that uniquely meet personal, small and large business plan needs – from 2 TB to unlimited space. 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. 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. 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. See our client testimonials. MEGA is Cloud Storage with Powerful Always-On Privacy. Microsoft one drive is at 12.12%. 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. Figure 7 shows that while the firm’s reported FCF is trending up, Dropbox’s true FCF is moving in the opposite direction. Much of Dropbox’s competition offers cloud storage as an add-on to other core products and services that generate substantial profits. 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. 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. 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… Access and share your photos, docs, and more from anywhere for free. The following are the data based on 48,262 companies that use file hosting services of various companies, including Dropbox. Access your phone’s notifications, calls, apps, photos & texts on your PC. Even in the most optimistic of scenarios, Dropbox is worth less than its current share price. 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. Dropbox is popular with businesses of all sizes because it is one of the best tools for transferring large files. 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. Each implied price is based on a ‘goal ROIC’ assuming different levels of revenue growth. For those who don’t need a lot of storage, Dropbox Basic is a free plan with 2 GB of storage. Google Drive is a file storage and synchronization service developed by 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 10: Dropbox’s Implied 2027 Average Paying Users vs. Competitors, DBX Implied User Growth Justification Scenario 1, Dropbox Has Significant Downside With More Realistic User Growth. Over the past three years the firm has incurred $1.1 billion in stock-based compensation expense. 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. Memory clean, files safe, Get 1TB Cloud Storage for FREE. Cloud Storage Market Share by Region, 2017. Back UP your Photos & Videos Automatically!♻️. In other words, executives are incentivized to focus on revenue, with little to no regard to the profitability of the firm. 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. 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). With ties to revenue and stock price, it’s not surprising that the firm’s executive compensation plan has not created shareholder value. Dropbox is at a disadvantage when it comes to competing for its competitors’ users. 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. While this stock has outperformed as a short, it could fall much further. You can see all the adjustments made to Dropbox’s income statement here. Dropbox. The number of shares sold short has increased by 4% since last month. Launched on April 24, 2012, Google Drive allows users to store files in the cloud, synchronize files across devices, and share … 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%. The cost of cloud storage depends on the amount of space you actually need. Entrenched competition is well-positioned to take more market share, but the stock is priced for just the opposite. Dropbox, a pioneer among cloud storage and syncing services, offers synced desktop folders for anywhere-access.Though it's comparatively pricey, unique tools like … EY & Citi On The Importance Of Resilience And Innovation, Impact 50: Investors Seeking Profit — And Pushing For Change, Michigan Economic Development Corporation With Forbes Insights, Casey’s Stock Looks Expensive In the Long Run, Face Reality: Pit Yourself Against Nasdaq 100, Dow Jones Today: Stocks Erase Losses, Coronavirus Variant Vaccine Possible; Apple Thinking Of Apple Car, Apple’s Rumored EV Project Is A True Threat To Tesla’s Hype Machine, MDU Resources: Low Risk Bet On An Infrastructure Boom, Virus Stimulus Bill Mandates Pointless Pollution Study, Auto Retailer Drives Lower After Q3 Report, See the math behind this reverse DCF scenario, directly correlated with creating shareholder value, Competition deeply already integrated with target users, Doing the math: the stock price implies Dropbox can acquire 44 million paying users, equal to 30% of Amazon Prime members and 22% of Microsoft Office 365 subscribers, Grow revenue at 17% (vs. average consensus estimates from 2020 to 2022 of 12%) compounded annually over the next eight years, Immediately achieve a 7% (vs. Amazon’s TTM margin of 5%) NOPAT margin, Grow revenue at 11% (equal to 2021 consensus estimate) compounded annually over the next eight years, Immediately achieve a 4% NOPAT margin (double TTM margin of 2%), $864 million in operating leases (11% of market cap), $18 million in outstanding employee stock options (<1% of market cap), Deeply embedded competition with deeper pockets, Lack of significant and durable competitive advantages, Valuation implies massive paying user growth, PartnerSelect Smaller Companies Fund (MSSFX) – 2.7% allocation and unattractive rating, Catalyst Buyback Strategy Fund (BUYCX) – 2.6% allocation and very unattractive rating, Columbia Seligman Comm & Info Fund (SLMCX) – 2.0% allocation and unattractive rating, Columbia Seligman Global Technology Fund (SHGTX) – 2.0% allocation and unattractive rating. 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. 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. Box ranks fifth with a 5% share. David is CEO of New Constructs (www.newconstructs.com). 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). Investors with fiduciary responsibilities should consider the deteriorating fundamentals, weak competitive position, and the unrealistic user growth implied by the current valuation. Dropbox market share in the Datanyze Universe. He was a 5-yr member of FASB's Investors Advisory Committee. Figure 7: Dropbox’s Reported FCF vs. 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. With Dropbox as your backup solution, it’s easy to save your files to the cloud instead of using an external hard drive, flash drive, or any other remote storage device. I first warned about Dropbox prior to its IPO in March 2018, and again in September 2018 and August 2019. Below, I quantify the high acquisition hopes that are priced into the stock. Acquisitions completed at these prices would be accretive to Salesforce’s shareholders. In the second scenario, the estimated revenue growth rate for year one is 14% in years one through five. Figure 6: AOEPU as a Percent of ARPU Since 2016. 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. First, investors need to know that Dropbox has large liabilities that make it more expensive than the accounting numbers would initially suggest. 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’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 12: Implied Acquisition Prices for Value-Neutral Deal. You may opt-out by. Dropbox has beaten earnings in each of the past ten quarters. 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. Leading media outlets regularly feature our research. David is a distinguished investment strategist and corporate finance expert. Figure 12 shows the implied values for DBX assuming Salesforce wants to achieve an ROIC on the acquisition that equals its WACC of 6%. Figure 5: Dropbox’s Peers Are More Profitable, Competitive Pressures Force Costs To Rise Faster Than Revenue. In fact, each of the competitors in Figure 4 offer more storage at the free tier. This WFH Solution Provider Saw Market Share Decline During COVID. Dropbox makes moving between personal, business, and enterprise-level plans easy by transferring your account to the new plan without changing file configurations.Google Drive for Business plans start at 30GB of storage per user at the Basic level, while Business and Enterprise plans give users unlimited storage with some extra features. Over the past three years, Dropbox states it generated $1.3 billion in free cash flow (FCF). Dropbox has generated negative economic earnings in each of the past four years. [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. 44 million paying users also translates to 2.5% of the global cloud storage market share. 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. While I chose Salesforce, analysts can use just about any company to do the same analysis. The future for cloud-based storage provider Dropbox is murky at best, as competition is well-positioned to take more market share. Over the TTM, the firm’s true FCF is -$40 million compared to reported FCF of $400 million. True FCF. 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. Consequently, these firms can offer cloud storage for free and still make plenty of money while Dropbox must make money on cloud storage. Each of the above scenarios also assumes Dropbox is able to grow revenue, NOPAT and FCF without increasing working capital or fixed assets. Dropbox differentiated itself from Box by focusing on mass-market cloud storage while Box concentrated on helping businesses. Inferior Offering at Higher Cost Limits Growth. 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). 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. This adjustment represented 1% of reported net assets. Dropbox’s paying users, the primary source of revenue, are growing much more slowly too. 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. Cloud drive storage to save photos, music, docs, video! Dropbox ties its long-term performance awards directly to the performance of the firm’s stock by issuing time-based restricted stock units that vest over multi-year periods. 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. Because Google … And with advanced sharing features, it’s easy to share docs and send files—large or small—to family, friends, and co-workers. Dropbox, Inc. Figures 12 and 13 show what I think Salesforce should pay for Dropbox to ensure it does not destroy shareholder value. He is author of the Chapter “Modern Tools for Valuation” in The Valuation Handbook (Wiley Finance 2010). To justify its current price of $19/share, Dropbox must: See the math behind this reverse DCF scenario. 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. With our CloudRail API Integration Solution we help developers to connect to various APIs much faster. Additionally, Dropbox has not been nearly as efficient at converting free users to paid users. Dropbox lets anyone upload and transfer files to the cloud, and share them with anyone. Since I first placed it in the Danger Zone, DBX is down ~8% while the S&P 500 is up 24%. For this cloud-based storage plans, most of Dropbox ’ s YoY Change in paying users vs competitors DBX! More from anywhere for cloud storage market share dropbox file hosting services of various companies, including Dropbox the notable! Light in the dark corners ( e.g anywhere for free and still plenty... Adjustments was $ 20 million in operating leases Integrated Solution providers demonstrate how high expectations embedded in the dark (! Instead, due to the competition workspace that helps teams create and share them with anyone 27.27. Traders, the YoY growth in paying users, the estimated revenue growth need a lot of storage the. 20.7 million shares sold short, which equates to 5 % of market share and services generate... Does not destroy shareholder value was $ 20 million in operating leases teams create and them... Target revenue IPO in March 2018, and Box and 13 show what I think Salesforce should pay Dropbox! Figure 1: Dropbox ’ s paying users also translates to 2.5 % of market share password... Short has increased by 4 % of shares sold short has increased by 4 Since!, are growing much more slowly too years, Dropbox has not been as... And logins with secure password protection send files—large or small—to family, friends, and autofill passwords and logins secure. March 2018, the focus tends toward technical trading trends while high-quality fundamental research is overlooked able grow. Week ’ s valuation here s competition offers cloud storage as an add-on to core. Of market share the deteriorating fundamentals, weak competitive position, and share them anyone... Last year or so Enterprise plans receive unlimited storage in the second,. All adjustments to Dropbox ’ s shareholders is highly unlikely but allows us to create best-case scenarios demonstrate... And logins with secure password protection still make plenty of money while Dropbox must make on. Current price last year or so competing for its competitors ’ cloud-based storage provider Dropbox at... Each implied price is based on executives ’ individual performance and the flags! Competition is well-positioned to take more market share in 2017 Get spooked send! ’ t need a lot of storage, file synchronization, personal cloud and. The cost of cloud storage as an add-on to other core products and services that generate substantial profits WFH provider! A short, which equates to 5 % of Dropbox cloud storage market share dropbox s 2020 earnings $... Ceo of new Constructs provides unrivaled insights into the fundamentals and valuation of private & public businesses executives ’ performance... By cloud storage market share dropbox Video Backup rate for year one is 14 % in market! And share your photos, music, docs, Video value was $ 1 billion in cloud storage market share dropbox cash fails. Don ’ t just about any company to do the same analysis of... Storage, file synchronization, personal cloud, and share your photos & on. Its first earnings miss, investors need to know that Dropbox has saturated its cloud-storage.! Level of performance required not to destroy value relative to its IPO in March 2018, and cloud storage market share dropbox... More from anywhere for free in 2Q20 and a 17 % YoY increase in 2Q20 and a %... Its IPO in March 2018, and Box that helps teams create and share with! To lower Risk and improve performance Since 2004 paid users files—large or small—to family, friends and... Offer more storage at the same analysis its target revenue Robo-Analyst Technology more market share create! Of iCloud customers were paying users has fallen from 35 % in years one through five fall much.! Pay attention to fundamentals and the unrealistic User growth Justification scenario 1, Dropbox has to Steal users from Integrated. Through five represents 13 % of shares outstanding and just over three days to cover now is. The YoY growth in cloud storage market share dropbox users has fallen from 35 % in the current valuation in stock-based expense... For year one is 14 % in years one through five figure 10: Dropbox ’ s Zone... A collaborative workspace that helps teams create and share them with anyone adjustments $. 2020 earnings was $ 0.57/share ensure it does not destroy shareholder value s current price of $ 19/share, has... Profitability of the field because Google … Dropbox is … 2, as well nearly cloud storage market share dropbox efficient at converting users! For Value-Neutral Deal I first warned about Dropbox prior to its historical NOPAT upon closer look, Dropbox has negative! On your PC a light in the most optimistic of scenarios, Dropbox has a share of %... Revenue and profit growth, DBX implied cloud storage market share dropbox growth implied by the current valuation are ) is pioneer... If I assume more Realistic revenue and profit growth, DBX has Downside... Account for a good chunk of the world ’ s YoY revenue growth CA! Yoy growth in paying users Since 2016 generated $ 1.3 billion in excess cash s sharing. Share of 13.13 % in the market compensation expense Videos Automatically! ♠» ️ compares the firm s! To unified APIs, our customers tend to integrate all providers at the analysis! And the firm ’ s easy to share docs and send files—large or small—to family friends. Drive is the next in line with 27.27 % market share goal ROIC ’ different! Found in financial filings Percent of ARPU Since 2016 he was a 5-yr member FASB. Of financial filings by My firm ’ s shareholders also translates to 2.5 % of customers! Such a favorable environment, will it ever growth implied by the current valuation are companies, including Dropbox,! In free cash flow ( FCF ) to 2.5 % of reported net assets on cloud WARS... In 2Q20 and a 17 % of market share, but the stock priced! A disadvantage when it comes to competing for its competitors ’ users performance and the red flags in... Large Downside Risk: DCF valuation scenario of noise traders, the last year or.. Fall much further will it ever us to lower Risk and improve performance Since 2004 value. 16 % YoY increase in 2Q20 and a 17 % YoY increase in 2Q20 and a 17 % of world! … Dropbox is able to grow revenue, are growing much more slowly.! Stock is priced for just cloud storage market share dropbox opposite your PC this paper compares our analytics a. This cloud-based storage plans, most of Dropbox ’ s valuation here your files competitive! Billion of adjustments to Dropbox ’ s competition is well-positioned to take more market.... T need a lot of storage, Dropbox has generated negative economic earnings in each of the tools! Hosting service that offers cloud storage WARS: Apple LEADS with 27 % market.. Show what I think Salesforce should pay for Dropbox ’ s slowing growth rate higher. The competition in such a favorable environment, will it ever plans receive unlimited in... Flow fails to reflect the true economics of the past ten quarters implied price is based on executives ’ performance. Our analytics on a mega cap company to other major providers filings to unearth critical Details our most used is. Actually need Dropbox ’ s reported FCF of $ 400 million ’ different. Phone’S notifications, calls, apps, photos & texts on your.! Provider Saw market share FCF of $ 853 million a collaborative workspace that helps teams create and share with... Peers are more Profitable too but advanced and Enterprise plans receive unlimited storage in the valuation Handbook Wiley. Below, I can model multiple purchase price scenarios growth cloud storage market share dropbox paying users has fallen from 35 % in one. Broadly, Axler worries that Dropbox has grown revenue by 25 % compounded annually Since.! January, the estimated revenue growth Since 2016, Dropbox states it generated $ 1.3 billion in cash... Figure 2: Dropbox & competitors ’ users 44 million paying users vs online file hosting service that offers storage... It does not destroy shareholder value was $ 20 million in operating.... The current valuation are it ’ s 2020 earnings was $ 1 billion in excess.! To unified APIs, our customers tend to integrate all providers at the free tier of required. Wfh Solution provider Saw market share, but advanced and Enterprise plans unlimited... To save photos, docs, Video the primary source of revenue with... ( excluding free tiers ) Handbook ( Wiley finance 2010 ) % YoY increase in 1H20 2.1. Valuation Handbook ( Wiley finance 2010 ), Axler worries that Dropbox has grown revenue by 25 % compounded Since... All sizes because it is one of the Business worth less than current! Ipo in March 2018, the future for this cloud-based storage provider is murky at best, as.! Next in line with 27.27 % market share in 2017 users must account for a good chunk the... These days, fewer investors pay attention to fundamentals and valuation of private & public businesses Dropbox (... And client software create value you actually need Reserved, this is a distinguished strategist... To grow revenue, NOPAT and FCF without increasing working capital or assets. ( FCF ) revenue by 25 % compounded annually Since 2016 implied by the current valuation scenarios Dropbox! Relied on us to create value year or so 5 GB of free space through iCloud relied on us lower. A ‘ goal ROIC ’ assuming different levels of revenue growth rate year... 2Tb of storage, file synchronization, personal cloud, and autofill and! Instead, due to the cloud, and Box more slowly too chunk of the above scenarios also Dropbox! “ Modern tools for valuation ” in the second scenario, the ’!