Dropbox Is No Longer A Boring Consumer Company

Dropbox (DBX) IPO’ed last March. Since then, its stock performance has been underwhelming. After initially popping up from its $21/share IPO price to trade in the high $20s and low $30s, It traded down below $20 on Christmas Eve and opened this morning in the $23/share range.

Although the IPO got some initial press coverage, you don’t hear about it much these days on business television or in the press. A flat stock contributes to that. Former Google exec, Dennis Woodside, who was Dropbox’s COO, announced he was leaving the company in August and that also likely didn’t help with optics to investors.

Many still think of Dropbox as the consumer file storage company that they signed up for 10 years ago for a free account and now never use. Where’s the business model in that?

Yet, Dropbox has seemingly recreated itself as a very large and growing enterprise subscription software service catering to team collaboration and project management. It surpassed $1 billion in annual revenues in 2017 and should do close to $1.4 billion for 2018 when they announce earnings in a few weeks from now. That makes them significantly larger than some of the more prominent enterprise SaaS companies that get a good deal of attention.

Here are some interesting facts about the “new” Dropbox which you might not know:

• Their sales have been growing in the mid- to high-20% range for the last few quarters
• Virtually all its revenue is recurring. So it’s really a SaaS company
• Its gross margins and operating margins have been expanding recently (to 75.9% and 12.8% respectively in the most recent quarter).
• It’s FCF and EBITDA positive and has been for some time.
• Dropbox paid users were up again last quarter to 12.3 million and its ARPU was also up sequentially (to +5.9% y/y).
• It follows a similar virality/self service sales model to Twilio, SendGrid (recently merged with Twilio), and Atlassian. Dropbox only spends 24% of revenues on Sales and Marketing costs (vs. 50% for many of its peers). Instead, it relies on word of mouth and link-sharing. This partly explains the high gross margins but also points to the potential for Dropbox to actually see revenue acceleration in the coming quarters. This is of course something that Wall Street investors would get very excited about if it happened.
• Dropbox did its biggest acquisition earlier this week for HelloSign (for $264 million) which allows for electronic signatures of documents in different verticals. This further signals they are going after high margin team/collaboration features to win more paying subscribers (and to complement their existing high-value features for project management and collaboration which their customers are already paying them for today).
• Churn has been steady.
• The company today says it has 50% of the Fortune 500 using Dropbox Business Teams. They still have a very large Total Addressable Market (TAM) to go after and their 10 year old consumer storage history gives them much more familiarity with potential customers than nascent start-ups.
• Salesforce invested $100 million in the Dropbox IPO — meaning they essentially own 3.5% of the company. Salesforce also invited Dropbox to their Dreamforce conference in September. It seems like the 2 could become meaningful partners to each other as they don’t compete directly. (You could also call it a Salesforce put on the Dropbox shares.)
• Dropbox is currently valued at a 7x P/S ratio for the TTM. This is on the low-end for SaaS companies currently. After a strong quarter earlier this week, ServiceNow sports a 15x P/S ratio.
• If Dropbox actually started seeing its revenues accelerate this year and got a higher P/S multiple like most other growing SaaS companies, the stock could get repriced meaningfully higher from current levels.
• If they only kept on increasing their sales at a decelerating rate, Dropbox is trading close to its 52 week lows and seems like a good candidate to go back to its initial post-IPO trading range of $30–42, if not into the $50s.

Dropbox’s biggest risk is probably that Microsoft and Google come after them more aggressively with their own team collaboration apps. Yet, they’ve had such products in the market for a while and Dropbox continues to grow with its neutrality and ease of use story.

Another risk is that Dropbox continues to get ignored by investors as we’ve seen in the past 6 months, despite its good earnings and the stock keeps drifting down.

However, all things considered, I think the risk/reward is very attractive for Dropbox at these levels. Hopefully for investors, the company’s viral business model will continue to take hold in 2019.

[Disclosure: Affiliates controlled by Eric Jackson hold long positions in Dropbox, Atlassian, and Twilio]

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