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Valuation: I made $2.1 billion of adjustments with a net effect of decreasing shareholder value by $90 million. I optimistically assume that Salesforce can grow Dropboxs revenue and NOPAT without spending any working capital or fixed assets beyond the original purchase price. Per Figure 2, the YoY growth in paying users has fallen from 35% in 2016 to just 10% TTM. David is CEO of New Constructs (www.newconstructs.com). Memory clean, files safe, Get 1TB Cloud Storage for FREE. By using our services, you agree to our use of cookies, Dropbox: Cloud Storage to Backup, Sync, File Share, By purchasing this item, you are transacting with Google Payments and agreeing to the Google Payments. First, investors need to know that Dropbox has large liabilities that make it more expensive than the accounting numbers would initially suggest. This WFH Solution Provider Saw Market Share Decline During COVID. However, the cost per user, or average operating expense per paying user (AOEPU) has risen even faster from $85 in 2016 to $99, or 5.2% compounded annually in 2019. In this scenario, Dropbox grows NOPAT from -$43 million in 2019 to $163 million in 2027, and the stock is worth just $7/share a 63% downside. The future for cloud-based storage provider Dropbox is murky at best, as competition is well-positioned to take more market share. However, upon closer look, Dropboxs free cash flow fails to reflect the true economics of the business. Figure 10: Dropboxs Implied 2027 Average Paying Users vs. Dropbox lets anyone upload and transfer files to the cloud, and share them with anyone. Google Drive is the next in line with 27.27% market share. You may opt-out by. Figure 6: AOEPU as a Percent of ARPU Since 2016. In other words, executives are incentivized to focus on revenue, with little to no regard to the profitability of the firm. Despite years of rapid revenue growth and reaching profitability, the future for this cloud-based storage provider is murky at best. In this scenario, Dropbox grows revenue by 17% compounded annually for eight years and reaches $5.6 billion in revenue in 2027, or 7.5 timesmore than the $737 million of revenue Box generated over the TTM. Dropbox, a pioneer among cloud storage and syncing services, offers synced desktop folders for anywhere-access.Though it's comparatively pricey, unique tools like With ties to revenue and stock price, its not surprising that the firms executive compensation plan has not created shareholder value. For instance, the firm adds back stock-based compensation, a non-cash, but very real expense that dilutes shareholder value, to its calculation of FCF. Even in the most optimistic of scenarios, Dropbox is worth less than its current share price. The combination of the firms slowing growth rate and higher expectations make a future beat more difficult. Consensus estimates show that the market expects the firms revenue growth rate to decline from 14% in 2020 to just 10% in 2022. With COVID-19-induced disruptions forcing most businesses to adapt their operations to be more remote friendly, Dropbox was in prime position to gain market share. Should the firm have its first earnings miss, investors could get spooked and send shares lower. Cloud drive storage to save photos, music, docs, video! I first warned about Dropbox prior to its IPO inMarch 2018, and again inSeptember 2018andAugust 2019. He is author of the Chapter Modern Tools for Valuation in The Valuation Handbook (Wiley Finance 2010). Investors with fiduciary responsibilities should consider the deteriorating fundamentals, weak competitive position, and the unrealistic user growth implied by the current valuation. Figure 11 compares the firms implied future NOPAT in this scenario to its historical NOPAT. The cost of cloud storage depends on the amount of space you actually need. The leading region in the Cloud Storage Industry was North America with a 42% cloud storage market share in 2017, followed by Europe with 28% cloud storage market share, Asia-Pacific with 25%, and the rest of the world with 5%. Below, I quantify the high acquisition hopes that are priced into the stock. 2. Dropbox has generated negativeeconomic earningsin each of the past four years. A new report by Unified API integration leader CloudRail shows that Dropbox leads the consumer cloud storage market with 63.8%, ahead of Google Drive, OneDrive and Box of all users choosing their service.. A newer version of this report is available: Cloud Storage Report 2017 CloudRail, a leader in API integration management solutions for app developers, released a new report analyzing Dropboxs share of the global cloud storage market has fallen from 4.4% in2017to 3.6% in2019as more competitors enter the space and existing competition ramped up storage options. True FCF. I think it is difficult to make a straight-faced argument that Dropbox can maintain that level of market share with a more expensive and less integrated product. Dropbox lets anyone upload and transfer files to the cloud, and share them with anyone. Dropbox controls 21% of the cloud storage market, according to Datanyze, putting it in second place behind Google Drive (34%) and ahead of OneDrive (12%). Over the past three years the firm has incurred $1.1 billion in stock-based compensation expense. $8.82 billion Dropbox's valuation, as of July 2020 The cloud storage market size is valued at $46.25 billion in 2019 and is expected to reach $222.5 billion by 2027, with a CAGR of 21% from 2020 to 2025. The COVID-19 pandemic has significantly changed how organizations work. Dropbox stated in its2Q20 earnings callthat it is on a trajectory to achieve its long-term free cash flow target of $1 billion by 2024. Launched on April 24, 2012, Google Drive allows users to store files in the cloud, synchronize files across devices, and share Each of the above scenarios also assumes Dropbox is able to grow revenue, NOPAT and FCF without increasing working capital or fixed assets. Top Competitors Websites Its 600 million users must account for a good chunk of the worlds knowledge workers, and now Dropbox is Access and share your photos, docs, and more from anywhere for free. Cloud Storage Market Share by Region, 2017. And with advanced sharing features, its easy to share docs and send fileslarge or smallto family, friends, and co-workers. Dropboxs return on invested capital (ROIC) only tops Box, and at less than 4%, is well below the peer groups market-cap-weighted average of 48%. Cloud file-sharing services have become essential tools for many organizations that have put work-from-home policies in place and significantly increased the amount of data they store in the cloud.. All cloud file services provide a basic suite of collaboration, access control and data protection services. EY & Citi On The Importance Of Resilience And Innovation, Impact 50: Investors Seeking Profit And Pushing For Change, Michigan Economic Development Corporation With Forbes Insights, Caseys Stock Looks Expensive In the Long Run, Face Reality: Pit Yourself Against Nasdaq 100, Dow Jones Today: Stocks Erase Losses, Coronavirus Variant Vaccine Possible; Apple Thinking Of Apple Car, Apples Rumored EV Project Is A True Threat To Teslas Hype Machine, MDU Resources: Low Risk Bet On An Infrastructure Boom, Virus Stimulus Bill Mandates Pointless Pollution Study, Auto Retailer Drives Lower After Q3 Report, See the math behind this reverse DCF scenario, directly correlated with creating shareholder value, Competition deeply already integrated with target users, Doing the math: the stock price implies Dropbox can acquire 44 million paying users, equal to 30% of Amazon Prime members and 22% of Microsoft Office 365 subscribers, Grow revenue at 17% (vs. average consensus estimates from 2020 to 2022 of 12%) compounded annually over the next eight years, Immediately achieve a 7% (vs. Amazons TTM margin of 5%) NOPAT margin, Grow revenue at 11% (equal to 2021 consensus estimate) compounded annually over the next eight years, Immediately achieve a 4% NOPAT margin (double TTM margin of 2%), $864 million inoperating leases(11% of market cap), $18 million in outstandingemployee stock options(<1% of market cap), Deeply embedded competition with deeper pockets, Lack of significant and durable competitive advantages, Valuation implies massive paying user growth, PartnerSelect Smaller Companies Fund (MSSFX) 2.7% allocation and unattractive rating, Catalyst Buyback Strategy Fund (BUYCX) 2.6% allocation and very unattractive rating, Columbia Seligman Comm & Info Fund (SLMCX) 2.0% allocation and unattractive rating, Columbia Seligman Global Technology Fund (SHGTX) 2.0% allocation and unattractive rating. Acquisitions completed at these prices would be accretive to Salesforces shareholders. New Constructs provides unrivaled insights into the fundamentals and valuation of private & public businesses. In the second scenario, the estimated revenue growth rate for year one is 14% in years one through five. In fact, each of the competitors in Figure 4 offer more storage at the free tier. Dropbox is popular with businesses of all sizes because it is one of the best tools for transferring large files. Though Dropbox's worth hit $12 billion in the fall of 2018, as of July 26, 2020, Dropbox has a market cap of approximately $8.82 billion. When I close theaccounting loopholes, I find that over the past three years, Dropbox generated a cumulative $329 million in true FCF and that FCF is rapidly declining. Businesses of all sizes because it is losing ground to the cloud, and passwords. I assume more Realistic User growth lower Risk and improve performance Since 2004 customers GB! 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