Dropbox Earnings: Content Collaborator Drops a Solid Quarter Amid Macro Uncertainty; Maintain FVE

We maintain our $24 fair value estimate for no-moat Dropbox DBX after the firm reported a strong third quarter against a tough macro backdrop. Dropbox’s customers, which are often individual users or small- to medium-sized businesses, or SMBs, tend to be price sensitive, especially during a time when their own budgets are being squeezed. While Dropbox has increased prices over the last year in a bid to drive sales forward, we believe Dropbox’s ability to take price action is limited due to the lack of abundant switching costs associated with its solutions. Unlike other software companies that are often mission-critical to their users’ workflows, Dropbox does not enjoy the same leverage over its customers. At the same time, we commend management’s decision to pivot away from commoditized cloud storage into areas such as document sharing, signatures, and team collaboration. We think that Dropbox could potentially develop switching costs for its customers if it offered a broader content collaboration platform. We think these results support our long-term thesis, and we view shares as marginally overvalued.

Dropbox’s sales for the third quarter clocked in at $633 million, up 7% year over year and 2% sequentially. Like the last quarter, management highlighted a $4 year-over-year increase in the average revenue per user, or ARPU, which now stands at $139. The main driver behind this increase in ARPU has been price increases for Dropbox Teams customers and FormSwift sales, which tend to have a higher ARPU. From a user additions perspective, Dropbox also had a solid quarter, adding 130,000 net new paying users sequentially and taking its total paying user count to 18.2 million.

On the profitability front, Dropbox reported an adjusted operating margin of 36%, up 440 basis points year over year. This stellar margin expansion was spearheaded by strong sales as well as Dropbox’s workforce reduction in April that allowed the company to reduce its operating expenses.