Acquisitions completed at these prices would be accretive to Salesforce’s shareholders. Because Google … David is CEO of New Constructs (www.newconstructs.com). Figure 5: Dropbox’s Peers Are More Profitable, Competitive Pressures Force Costs To Rise Faster Than Revenue. 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. However, upon closer look, Dropbox’s free cash flow fails to reflect the true economics of the business. 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 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. 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. 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%. David is a distinguished investment strategist and corporate finance expert. 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. Dropbox is popular with businesses of all sizes because it is one of the best tools for transferring large files. This WFH Solution Provider Saw Market Share Decline During COVID. There are currently 20.7 million shares sold short, which equates to 5% of shares outstanding and just over three days to cover. To justify its current price of $19/share, Dropbox must: See the math behind this reverse DCF scenario. Decline of Dropbox . 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. The cost of cloud storage depends on the amount of space you actually need. Valuation: I made $2.1 billion of adjustments with a net effect of decreasing shareholder value by $90 million. 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. Balance Sheet: I made $1.4 billion of adjustments to calculate invested capital with a net decrease of $853 million. 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. No other competitors claimed more than 4% of the field. This assumption is highly unlikely but allows us to create best-case scenarios that demonstrate how high expectations embedded in the current valuation are. Entrenched competition is well-positioned to take more market share, but the stock is priced for just the opposite. 20% of iCloud customers were paying users in 2018, the last time Apple shared that stat. 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. The other players boasting a double-digit usage share were Dropbox with 17%, Amazon Cloud Drive with 15% and Google Drive with 10%. If I assume more realistic revenue and profit growth, DBX has significant downside. Over half of Americans online have never used cloud storage service Figure 4 shows that Dropbox offers neither the most storage nor the cheapest storage (excluding free tiers). 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. True FCF. This scenario represents the minimum level of performance required not to destroy value. The most notable adjustment to shareholder value was $1 billion in excess cash. Figure 7: Dropbox’s Reported FCF vs. Dropbox has a share of 34.44% in the online file hosting industry. 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). Its share price DBX is down ~8% while the S&P 500 is up 24% over the last year or so. Even in the most optimistic of scenarios, Dropbox is worth less than its current share price. 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. Dropbox lets anyone upload and transfer files to the cloud, and share them with anyone. Dropbox, Inc. 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%). 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. 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. Figures 12 and 13 show what I think Salesforce should pay for Dropbox to ensure it does not destroy shareholder value. Each of the above scenarios also assumes Dropbox is able to grow revenue, NOPAT and FCF without increasing working capital or fixed assets. Over the past three years the firm has incurred $1.1 billion in stock-based compensation expense. 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. Dropbox lets anyone upload and transfer files to the cloud, and share them with anyone. Dropbox has over 600 million registered users, but as of 2Q20, just 15 million (or 3% of registered users) were paying users. New Constructs provides unrivaled insights into the fundamentals and valuation of private & public businesses. Investors with fiduciary responsibilities should consider the deteriorating fundamentals, weak competitive position, and the unrealistic user growth implied by the current valuation. In other words, executives are incentivized to focus on revenue, with little to no regard to the profitability of the firm. 44 million paying users also translates to 2.5% of the global cloud storage market share. One of our most used categories is Cloud Storage. 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 … Access your phone’s notifications, calls, apps, photos & texts on your PC. 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. 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. These days, fewer investors pay attention to fundamentals and the red flags buried in financial filings. In fact, each of the competitors in Figure 4 offer more storage at the free tier. Per Figure 8, Dropbox has grown revenue by 25% compounded annually since 2016. Cloud storage isn’t just about uploading your files. 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. Over the TTM, the firm’s true FCF is -$40 million compared to reported FCF of $400 million. 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. Instead, due to the proliferation of noise traders, the focus tends toward technical trading trends while high-quality fundamental research is overlooked. Back UP your Photos & Videos Automatically!♻️. For those who don’t need a lot of storage, Dropbox Basic is a free plan with 2 GB of storage. Should the firm have its first earnings miss, investors could get spooked and send shares lower. 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 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). 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. Dropbox. Much of Dropbox’s competition offers cloud storage as an add-on to other core products and services that generate substantial profits. 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%. 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. Software Solution. Dropbox cloud storage offers a range of plans that uniquely meet personal, small and large business plan needs – from 2 TB to unlimited space. MEGA is Cloud Storage with Powerful Always-On Privacy. Critical Details Found in Financial Filings by My Firm’s Robo-Analyst Technology. Dropbox should link executive compensation with improving ROIC, which is directly correlated with creating shareholder value, so shareholders’ interests are properly aligned with executives’. 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. 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. 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. On The Basis Of Product, The Private Cloud Storage Market Is Primarily Split Into. Figure 13: Implied Acquisition Prices to Create Value. Figure 12: Implied Acquisition Prices for Value-Neutral Deal. 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. More broadly, Axler worries that Dropbox has saturated its cloud-storage market. Figure 11: DBX Has Large Downside Risk: DCF Valuation Scenario. 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. Opinions expressed by Forbes Contributors are their own. [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. 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. 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. 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. 5 % of iCloud customers were paying users also translates to 2.5 % of Chapter... 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