Dropbox Valuation - Quick N’ Clean
Click any link in the list below to jump to topic
- What is Dropbox
- What Sets Dropbox Apart
- Digging into the financials
- Relative & Intrinsic Valuations
- Is Dropbox Really a Buy
Dropbox’s shares have fallen -27.6% from its July high of $26.20, which was under the recent February high of $26.49 as of 09/06/2019. It’s also -56.4% under the ATH of $43.50, so I saw this as a perfect opportunity to leverage R and run a “Quick N’ Clean” valuation to answer a couple questions like “What sets Dropbox Apart” and more.
I’ve followed the software space for a while now, and I find it interesting that the leader in the collaboration tools industry has seen selling pressure from investors. Dropbox has proved itself as the leader in this space with double-digit YoY revenue growth and increasing the amount of Paid Users. Dropbox is one of the few companies to recently go public that is successfully competing with the largest players in this space (Google, Microsoft, Apple, Amazon). Let’s quickly review Dropbox as a company and then the financial prospects to arrive at a “Quick N’ Clean” Valuation.
Dropbox is one of the smaller players in a dominated cloud sector, but a leader in the more niche collaboration tools industry. As more companies begin to transition into a data-oriented business, data storage and sharing will become vital for companies to grow. More employees will need to access and share files from anywhere, and consumers will prefer the apps that have a great and easy-to-use UI. File sharing will be seen as a major feature in collaboration tools services and this is where Dropbox provides a beautiful UI that’s extremely easy-to-use.
Is it Really a BUY
According to NASDAQ’s website, Dropbox has 11 Analysts ratings with 8 as Strong Buys, 1 as Buy, 2 as Hold, and 0 as Sell. Looking at Seeking Alpha, they have 16 Analysts with 8 as a Buy, 3 as Outperform, 3 as Hold, 3 as Underperform and 0 as Sell. I like to venture where the crowd doesn’t go, so I wanted to seek out reasons why Dropbox could possibly be a sell. I wanted to find answers to the questions “what sets dropbox apart from competitor services” and also “is the stock undervalued on a relative scale”.
After extensive research and comparisons between dropbox and its peers, I found the answers to the first question as to why dropbox and what sets them apart. Other than the obvious risks from the big cloud competitors, it was hard to find reasons to sell Dropbox. I conducted a survey that targeted consumer and enterprise Dropbox users that shedded a positive light on Dropbox. Now I hope to find an answer to whether Dropbox really is a “Buy” and to see some real support for an “undervalued” stock after running relative and intrinsic valuations.
Question 1: Whats Sets Dropbox Apart?
Dropbox’s popularity and network effect among consumers is nothing short of dominant. I created a two-question survey in various social threads where consumers / companies use Dropbox and its competitors to ask these questions;
Do you use Dropbox over its competitors such as Box, Google Drive, AWS S3, or Microsoft Onedrive? If yes, what moat or differentiator does Dropbox have compared to the others?
Why so many enterprises and smaller companies like to use Dropbox than others.
The general answers made it a little clearer to me why Dropbox continues to be the leader in this space. In general, respondents seemed to favor Dropboxes upload speed and the light CPU usage compared to competitors like google drive, as well as the very easy to use GUI vs others (google drive came in second). I noticed some people did say Dropbox was a little pricier vs its competitors (it raised its most popular subscription price in June by 20%) but none said it would push them to cancel the subscription and look elsewhere.
With that said, I think Paying Subscribers are the biggest catalyst to Dropboxes growth. This can be through its consumer or enterprise customers. Enterprise is leading in terms of additional subscribers but I think growth has been shy of what management visioned. There could be a possibility that the enterprise users are picking up the slack from the paying consumer business. This small slowdown is not because of lack of quality or innovation, but because many services are offering free tiers that consumers are using.
Doesnt Come Without Risks
I noticed one trend in general from my small survey. There were not many respondents who used only one service (either Dropbox, Box, Google Drive, Amazon S3, Microsoft OneDrive). They all gave feedback on all of the services mentioned mostly because they sign up to multiple free-tier services to use each one for different purposes. The risk here is two-fold. Dropbox could lose paying subscribers to one of the competitor services that the user already has a free tier on (could be because of cheaper prices, additional features, etc.), or Dropbox could have existing paying subscribers spend less because they move a portion of their spending to another competitor.
Google drive is the clear runner up in Dropboxes segment, so if Google wanted to do a complete revamp that created a fresh new GUI and incorporates all of its features from its arsenal of services then that could be a big threat to Dropbox. Also, I noticed AWS S3 is not well-known. If Amazon decided they wanted to add a consumer-friendly GUI to S3 (they currently do not really have one, it’s all dashboard/programming related), then this could also be a big threat due to Amazons resources and the fact that you pay as you go vs subscription and it’s virtually unlimited storage (with different tiers priced differently as well). Dropbox continues to integrate deeply through partnerships such as Slack, Zoom, and Atlassian but these two large companies already have a large network of amazing services of their own. Despite this, Dropbox continues to be the first that comes to mind and use when we think of consumer/enterprise cloud sharing storage.
Is Dropbox Really a Buy?
Finally, the question we’ve all been asking. Is Dropbox Really a Buy? There are very few companies that can compete with the big four Google, Amazon, Apple, and Microsoft, let alone a company that IPO’d only within the last 12 months. NO ONE can accurately predict every time where a stock is going to head in a few weeks or where it will close tomorrow. I try tell whether a stock is a good and attractive buy that will appreciate in the long run, but I can’t promise about tomorrow. Not trying to BS anyone.
To answer the question, I believe it is a good time to buy shares of Dropbox as wall street is missing the sticky and growing customer base through the lens of competition & risk worries which is leading to its undervaluation in both relative and intrinsic terms. Even under the “Quick N’ Clean” intrinsic valuation where I used bare-bone assumptions, I am seeing an estimated price of $23.71 as of 09/09/2019 which is 24.99% above the previous close of $18.97 (09/06/2019).
I plan on taking this “Quick N’ Clean” valuation and create a more complex DCF Model in excel. I will also do more extensive research into its direct comparables as well as more fundamental research to have better assumptions for three different scenarios if these were not appropriate enough. If this “Quick N’ Clean” valuation showed that it was Overvalued, then I would not want to put the time and effort into a more extensive model! Time is $$$ so I look for ways to save it.