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Cash bonuses were awarded in 2019 based on executives’ individual performance and the firm’s performance relative to its target revenue. Decline of Dropbox . Cloud storage isn’t just about uploading your files. 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. Since I first placed it in the Danger Zone, DBX is down ~8% while the S&P 500 is up 24%. One of the most notable adjustments was $20 million in operating leases. Per Figure 8, Dropbox has grown revenue by 25% compounded annually since 2016. WebDrive has a share of 13.13% in the market. With our CloudRail API Integration Solution we help developers to connect to various APIs much faster. 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. Fiduciaries should avoid this week’s Danger Zone pick: Dropbox Inc. (DBX). David is a distinguished investment strategist and corporate finance expert. 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. 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”. 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. Instead, due to the proliferation of noise traders, the focus tends toward technical trading trends while high-quality fundamental research is overlooked. Dropbox. Access and share your photos, docs, and more from anywhere for free. Each of the above scenarios also assumes Dropbox is able to grow revenue, NOPAT and FCF without increasing working capital or fixed assets. Paper is a collaborative workspace that helps teams create and share early ideas. 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. 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. Back up and sync docs, photos, videos, and other files to cloud storage and access them from any device, no matter where you are. 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. 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. You can see all the adjustments made to Dropbox’s income statement here. Opinions expressed by Forbes Contributors are their own. If I assume more realistic revenue and profit growth, DBX has significant downside. Store, sync, and autofill passwords and logins with secure password protection. 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. 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. Each implied price is based on a ‘goal ROIC’ assuming different levels of revenue growth. Back up and sync docs, photos, videos, and other files to cloud storage and access them from any device, no matter where you are. Its share price DBX is down ~8% while the S&P 500 is up 24% over the last year or so. 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. 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 paying users, the primary source of revenue, are growing much more slowly too. While I chose Salesforce, analysts can use just about any company to do the same analysis. Its 600 million users must account for a good chunk of the world’s knowledge workers, and now Dropbox is … 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. The combination of the firm’s slowing growth rate and higher expectations make a future beat more difficult. All Rights Reserved, This is a BETA experience. Back up and sync docs, photos, videos, and other files to cloud storage and access them from any device, no matter where you are. Due to unified APIs, our customers tend to integrate all providers at the same time. This adjustment represented 1% of reported net assets. Combining human expertise with NLP/ML/AI technologies (feat. 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. 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%. Consequently, these firms can offer cloud storage for free and still make plenty of money while Dropbox must make money on cloud storage. 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. 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. Investors with fiduciary responsibilities should consider the deteriorating fundamentals, weak competitive position, and the unrealistic user growth implied by the current valuation. 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. 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. 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). Dropbox Business starts at 2TB of storage for the Standard plan, but Advanced and Enterprise plans receive unlimited storage in the cloud. 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. Figure 11: DBX Has Large Downside Risk: DCF Valuation Scenario. And with advanced sharing features, it’s easy to share docs and send files—large or small—to family, friends, and co-workers. 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. New Constructs provides unrivaled insights into the fundamentals and valuation of private & public businesses. Figure 12: Implied Acquisition Prices for Value-Neutral Deal. 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. Per Figure 2, the YoY growth in paying users has fallen from 35% in 2016 to just 10% TTM. The COVID-19 pandemic has significantly changed how organizations work. 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. For instance, Apple offers all of its customers 5 GB of free space through iCloud. I first warned about Dropbox prior to its IPO in March 2018, and again in September 2018 and August 2019. However, upon closer look, Dropbox’s free cash flow fails to reflect the true economics of the business. 1800 Owens St 20% of iCloud customers were paying users in 2018, the last time Apple shared that stat. Memory clean, files safe, Get 1TB Cloud Storage for FREE. The cost of cloud storage depends on the amount of space you actually need. Dropbox is at a disadvantage when it comes to competing for its competitors’ users. For just the opposite providers at the end of January, the focus tends toward technical trends. Fcf ) % in years one through five Websites Dropbox lets anyone upload and transfer to... 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