Why Dropbox Shares Could Climb 40% From Here

Why Dropbox Shares Could Climb 40% From Here

over 2 years ago4 mins

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Tell us about yourself, Mamoon

I’m Mamoon Ali and I work in the energy sector in project controls and optimization.

What’s the pitch?

Buy Dropbox shares (ticker: DBX), with a 40% potential upside.

Dropbox started in 2008 as a cloud storage service. Since then it’s evolved from a simple service that backs up your personal files and syncs them to other devices, to a hub for teams and organizations to keep their data together, by establishing a “smart” workspace that now includes products and services beyond cloud storage.

Dropbox has been seeing organic growth across the years. It’s average operating margin of 21% is expected to reach 30% within the next five years. 

What does Dropbox do?

Cloud: it’s the original cloud storage service for files and folders. The service is offered in multiple subscription plans to suit users’ needs.

  • Transfer: special protocol of sending very large files faster and easier
  • Vault: encrypted folders for additional privacy and security.
  • Password: password management service
  • HelloSign (recent acquisition): electronic signature service
  • DocSend (recent acquisition): secure self-serve document sharing and analytics product

What’s your investment thesis?

  • Excellent management team, with its founder Drew Houston still operating as CEO, with a large shareholding means he has skin in the game.
  • Dropbox keeps on expanding its core products and services that are designed to better integrate the workplace.
  • Dropbox has open ecosystems designed for users and willing for open integration to enable more workflows that promote growth and retention of its customers. The company boasts over 60 billion Application Programming Interface (API) calls per month, over 1 million registered developers, with 85% of paid Dropbox users linking to a third party app.
Dropbox's cloud ecosystem
  • Even with fierce competition, Dropbox has a 20% market share, second only to Google’s 35%. Despite Google's gigantic reach to millions of companies and users, Dropbox is able to compete in a niche part of that market.

What are the key events you’re watching?

  • Number of paying users versus registered users: 16.1 million versus 700 million in the second quarter of 2021
  • Growth in the company’s average revenue per user (ARPU): $133.15 last quarter, up from $128.50 in 2020
  • Cash flow growth, reaching the company’s target of $1 billion by 2024
  • Introduction of new products and services that will keep up growth momentum.


Intrinsic valuation:

Based on the discounted cash flow (DCF) method: calculating weighted average cost of capital (WAAC) at 10.4, assuming a revenue growth rate of 12.5% over the next 10 years, operating margins of 25-30%, and achieving free cash flow of $1 billion by 2024. I reach a fair value per share of $45.10, up more than 40% from Dropbox’s current share price of $31.71.

Relative valuation:

There are no competitors that offer exactly the same set of services as Dropbox. So I’ve compared valuation multiples with Dropbox's newly acquired HelloSign eSignature service along with the leading performer in that market, DocuSign (ticker: DOCU).

Using a price-to-sales (P/S) ratio as a more reliable multiple for growth companies that either are not making profit or started profiting from their businesses recently. DocuSign is currently trading at a P/S ratio of 26.9, versus Dropbox’s 6.1. And while DocuSign could be overvalued for different reasons, the belief of the rapid growth of the eSignature market was the main driver behind such valuation. In my view, this gives Dropbox another growth opportunity of 4.4 times its current price to equal Docusign’s multiple, if it manages to leverage its positioning with Hellosign.

Dropbox trades at a forward price-to-earnings (P/E) multiple of 22.7, which is similar to S&P 500 current P/E ratio of 22.2. The average P/E ratio of SaaS companies in the S&P 500 is 43. In my view, this gives Dropbox the potential to outperform S&P 500, potentially by 1.89 times its current price.

What are the big risk factors you’ve spotted, and how do you plan to mitigate them?

The adoption rate and competition landscape in the SaaS sector, cloud storage in particular, makes it challenging for Dropbox to keep up and stay on its competitive edge. Mitigation of such a risky environment can happen through a very close follow-up on its news and quarterly calls to identify any change in the company’s fundamentals, and ensure its fair allocation in a more diversified portfolio.

This insight was submitted by a community member for information and educational purposes. It doesn't represent the views of the Finimize team and shouldn't be taken as financial advice.

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