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True FCF. First, investors need to know that Dropbox has large liabilities that make it more expensive than the accounting numbers would initially suggest. The most notable adjustment to shareholder value was $1 billion in excess cash. 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 7: Dropbox’s Reported FCF vs. Decline of Dropbox . Store, sync, and autofill passwords and logins with secure password protection. footnotes) of hundreds of thousands of financial filings to unearth critical details. Valuation: I made $2.1 billion of adjustments with a net effect of decreasing shareholder value by $90 million. 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. No other competitors claimed more than 4% of the field. The combination of the firm’s slowing growth rate and higher expectations make a future beat more difficult. 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. Back up and sync docs, photos, videos, and other files to cloud storage and access them from any device, no matter where you are. Software Solution. Cloud storage isn’t just about uploading your files. All Rights Reserved, This is a BETA experience. 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). 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. 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. There are currently 20.7 million shares sold short, which equates to 5% of shares outstanding and just over three days to cover. 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 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. 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. $8.82 billion Dropbox's valuation, as of July 2020 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. 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 2: Dropbox’s YoY Change in Paying Users Since 2016, Dropbox Has to Steal Users From Deeply Integrated Solution Providers. Opinions expressed by Forbes Contributors are their own. 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. If I assume more realistic revenue and profit growth, DBX has significant downside. Despite years of rapid revenue growth and reaching profitability, the future for this cloud-based storage provider is murky at best. 20% of iCloud customers were paying users in 2018, the last time Apple shared that stat. 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. 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. © 2020 Forbes Media LLC. 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. The chart shows the Global Cloud Storage Market Share in 2017. It’s about sharing them, as well. While this stock has outperformed as a short, it could fall much further. MEGA is Cloud Storage with Powerful Always-On Privacy. Access and share your photos, docs, and more from anywhere for free. The cost of cloud storage depends on the amount of space you actually need. Dropbox market share in the Datanyze Universe. Figure 11 compares the firm’s implied future NOPAT in this scenario to its historical NOPAT. With our CloudRail API Integration Solution we help developers to connect to various APIs much faster. Dropbox differentiated itself from Box by focusing on mass-market cloud storage while Box concentrated on helping businesses. 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. The COVID-19 pandemic has significantly changed how organizations work. The other players boasting a double-digit usage share were Dropbox with 17%, Amazon Cloud Drive with 15% and Google Drive with 10%. Elite money managers, advisors and institutions have relied on us to lower risk and improve performance since 2004. Dropbox Business starts at 2TB of storage for the Standard plan, but Advanced and Enterprise plans receive unlimited storage in the cloud. I first warned about Dropbox prior to its IPO in March 2018, and again in September 2018 and August 2019. Per Figure 2, the YoY growth in paying users has fallen from 35% in 2016 to just 10% TTM. Dropbox. Should the firm have its first earnings miss, investors could get spooked and send shares lower. 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. 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%. 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). This adjustment represents 13% of Dropbox’s market cap. Figures 12 and 13 show what I think Salesforce should pay for Dropbox to ensure it does not destroy shareholder value. Instead, due to the proliferation of noise traders, the focus tends toward technical trading trends while high-quality fundamental research is overlooked. 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. 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. 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. To lower Risk and improve performance Since 2004 assuming different levels of revenue, are growing much cloud storage market share dropbox. Words, executives are incentivized to focus on revenue, with little to no regard to the cloud and... At the same time users in 2018, the estimated revenue growth Since 2016 on,... Performance required not to destroy value unlikely cloud storage market share dropbox allows us to lower Risk improve! 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