Is Dropbox a Good Investment?

Dropbox Inc. (NASDAQ:DBX) is well-known these days as the cloud-based application that helps people to store files, share them and synchronize with other devices. 

Dropbox revolutionized file management by addressing a common problem faced by millions worldwide. Large file transfers were challenge pre-Dropbox, as was backing up a lot of data, and syncing it to different devices.

The company’s disruptively simple innovation in 2007 didn’t go unnoticed by Big Tech. As the years have gone by, Google Drive sought to compete and now controls 31.19% of the software market share for file sharing, while Dropbox sits in second place with a share of 18.61%. 

Nevertheless, Dropbox shares are facing downward pressure after management announced a possible weakness in the growth of subscriptions this year. With around 18% drop in price already this year and a market capitalization of around $8 billion, what does the future hold?

What Dropbox Offers Beyond Storage?

In addition to file storage and sharing, Dropbox has added several new tools to its line. It has now expanded its portfolio of collaboration and productivity tools in order to strengthen its product suite. For example, it offers Dropbox Capture, which is a feature that lets you share files containing videos, recordings, screenshots, and GIFs with other users.

In addition to that, Dropbox Replay is the feature that brings together collaborators to discuss and comment on videos, sound, and images and finalize them. Meanwhile, Dropbox Shop is a flexible digital sales software designed to help creators to sell content and earn money directly via Dropbox as well.

By offering extended services, management expects the company to evolve from a tool suite into a multifunctional platform used by various people on a daily basis for different purposes, such as creating and collaborating on content as well as transacting online.

These additions are slated to attract new users as well as to foster a deeper connection with present users. As such, Dropbox has the potential to become an integral part of daily working processes.

As the market grows ever crowded with competitors, these tools beyond mere storage are aimed at building a broader moat, or competitive edge, around the firm by enabling users to be more productive. If it can satisfy customers this way, the odds improve that they will be more loyal, which in turn will boost customer lifetime values.

Beyond simple file storage, the firm has an elaborate suite already, including Dropbox Paper, Dropbox Transfer, Dropbox Showcase, and Dropbox Spaces. Plus, Dropbox Business serves companies of all sizes and includes advanced administrative control and capabilities like editing and sending out project proposals, as well as signing contracts and delivering the files without switching between applications.

Signaling its commitment to becoming a platform, Dropbox integrates with apps such as Adobe and Zoom via Dropbox Extensions with the aim of making clients work processes more seamless and ultimately to improve their productivity. 

Is Growing Competition a Concern?

The cloud storage market is growing rapidly and Dropbox faces fierce competition in spite of or perhaps even because of its leading role.

Google Drive is the major competitor with unsurpassed reach and integration in the Google universe. Alphabet (Google’s parent) leverages its broad spectrum of productivity tools for users and employs a friendly user interface and straightforward collaboration features. Arch-nemesis Microsoft also has an offering via OneDrive, which is growing in popularity. Alongside these Big Tech solutions, Apple iCloud stands toe to toe with them.

On the other hand, Box, which is viewed as a competitor, focuses on enterprise users looking for heightended security.

Amazon Drive, too, is a scalable solution that capitalizes on the reach and capacity of the AWS environment.

Beyond the headline solutions, a variety of privacy-conscious alternatives such as Sync, MEGA, and SpiderOak also exist and have attracted users who care more about their data privacy.

To alleviate competitive pressures, Dropbox is focused on innovation primarily. Specifically, it knows that integration with other applications, as well as advanced collaboration tools create a stickiness that makes it hard for users to leave once dependent on them. Time will tell whether these initiatives are broadly adopted by consumers and lead to higher lifetime value and lower churn.

Is a Secular Decline Beginning?

Dropbox’s shares crashed after the company issued a frail revenue outlook. Management cited pressures around paying user growth as the reason for the dull forecast.

The company’s expected revenue for 2024 ranges from $2.53 billion to $2.55 billion, which is less than what analysts had expected. This is in addition to the disappointing forecast of $910 million to $950 million of free cash flow for 2024 versus the target of $970 million. Higher R&D costs as well as tax-related costs were to blame for the lower figures.

The loss of paying users can be accounted for by measures taken to curb family plan abuses and end of the unlimited storage offer. It’s fair to say that some users will be deeply embedded in other ecosystems, such as Google most notably, and will inevitably question why they are paying for Dropbox when they could simply use Drive for storage and file sharing.

Last fiscal year, the total revenue was $2.50 billion, which was a 7.6% increase compared to the previous fiscal year. The number of paying users was 18.12 million for Q4 of 2023, while it was 17.77 million in Q4 of the previous year.

Average revenue per paying user was $138.83, compared to $134.53 for the same period last year. The number of paying users decreased by 50,000 as compared to the prior quarter.

The highly disappointing quarterly results resulted in a downgrade by BofA analysts, who modified their recommendations from a Buy to an Underperform. They suggest that the bullish trend of Dropbox has ended, and it might be starting a secular decline.

Is DBX a Good Investment?

Analysts remain bullish on DBX as a good investment with upside potential to $27.67 per share, suggesting a 17.9% increase.

On a multiples basis, the stock is trading at 11.86x non-GAAP forward earnings, which seems low compared to its peers. It is also about 48% below the 5-year average of 22.57x.

The key forward price-to-sales multiple of 3.21 suggests, however, that the stock is trading at a premium to its peers.

The bottom line is that Dropbox is aware that file storage alone is under serious competitive pressures and has been innovating as a way to alleviate the loss in paying subscribers by boosting retention.

While the new features are going to bring along new revenue streams and attract more customers, investors should take a cautious approach. It’s unclear as of now whether Bank of America’s call will prove prescient and a longer term secular decline has begun.

#1 Stock For The Next 7 Days

When Financhill publishes its #1 stock, listen up. After all, the #1 stock is the cream of the crop, even when markets crash.

Financhill just revealed its top stock for investors right now... so there's no better time to claim your slice of the pie.

See The #1 Stock Now >>

The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.