Steer Clear of Overpriced Dropbox
Commodification of storage technology will inhibit the firm from driving growth through price increases ahead.
Dropbox's (DBX) second quarter as a public company came within our expectations and we are maintaining our $14 per share fair value estimate and no-moat rating. The firm reported revenue of $339 million and raised its guidance range to $1.366-$1.372 billion for the year, with paying users expanding from 11.5 million to 11.9 million over the last quarter. On a positive note, Dropbox experienced ARPU expansion as business customers were migrated from legacy plans to new pricing models, some of which were more expensive, resulting in an ARPU uplift to $116.66. Longer-term, we reassert that Dropbox’s closest competitors in both storage and collaboration include Apple, Amazon, Google, and Microsoft, the four largest companies by market capitalization. We would caution investors from opening a position in this name.
In terms of our modeling, we believe the firm can grow revenue at a 15% five-year CAGR, placing our estimates at the upper end of consensus. We think the business can achieve GAAP profitability in 2019, but we "only" think GAAP operating margin can expand into the low-20% range over 10 years, below peers. Dropbox's growth opportunity is a double-edged sword. Dropbox could either build out a salesforce in an attempt to gain share against wide-moat competitors such as Google and Microsoft, leading to margin compression, but faster top line growth. Conversely, the firm could rely on self-serve adoption, leading to more robust margins but tepid enterprise revenue growth. Dropbox affirmed it will not build out an enterprise salesforce at this juncture, and we struggle with the notion that individual subscribers will succeed in evangelizing Dropbox's offerings such that their employers will use the service at the enterprise level. Additionally, while Dropbox drove ARPU growth through new pricing on the enterprise side this quarter, we posit that commodification of the firm's storage technology will inhibit the firm from driving growth through price increases ahead.
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William Fitzsimmons does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.