Dropbox (DBX) $21.25 – I’m Neutral On This Company
Dropbox has been quite the underperformer, in the last 5 years the stock has lost 7%, and 8% in the past year.
Sales growth has really slowed down from 8-10% to only 3-4% expected for the next 3 years and that’s why there’s no appreciation for the stock. Its a fairly profitable company 15-16% operating margins and cash flow of 30+% because of the high stock-based compensation. Earnings growth is also tepid with just 6-8% expected for the next three years. These are two big reasons why there isn’t much scope for Dropbox to grow.
Dropbox is proving to be less sticky than originally thought. As churn rates have increased over the past year, many investors are re-evaluating the stickiness and value of Dropbox’s subscription revenue base.
Deep competition- Dropbox has always been in an eternal tug-of-war with competitors Google Drive (which has an advantage in pricing and integration with consumer email accounts) and Box, Inc. (BOX), which is better known for its enterprise-grade features and security.
Confidence in Dropbox faltered even more after the company reported rather dismal Q1 results – Analysts have an average hold rating.
Box (BOX), which is about 40% the size of Dropbox, not surprisingly, has a better growth profile with 6-7% revenue growth and 11-12% earnings growth expected in the next 3-4 years. It has a similar valuation multiple, so it’s not like that the markets have given it too much of a premium.
The main thing is that growth will likely be in the low to mid-single digits in this industry, so can’t expect too much in terms of return from either.
The one thing Dropbox/Box could do is to put their cash to better use (both generate in excess of 30% cash margins) and buyback shares, the valuations are low enough, which would help them and also help investors. For now, its neutral – don’t see much scope for expansion.
