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 times more than the $737 million of revenue Box generated over the TTM. See the math behind this reverse DCF scenario. average consensus estimates from 2020 to 2022 of 12%) compounded annually over the next eight years To justify its current price of $19/share, Dropbox must: True FCFĭBX Revenue And Core Earnings New Constructs, LLCĭropbox Is Priced to Reach 44 Million Paying Users or 30% of Amazon Prime Membersĭespite facing larger and more entrenched competition, Dropbox is priced as if it will quickly improve profitability while also increasing its average paying users to equal 30% of Amazon’s Prime members. Figure 7 shows that while the firm’s reported FCF is trending up, Dropbox’s true FCF is moving in the opposite direction.įigure 7: Dropbox’s Reported FCF vs. Over the TTM, the firm’s true FCF is -$40 million compared to reported FCF of $400 million. When I close the accounting loopholes, I find that over the past three years, Dropbox generated a cumulative $329 million in true FCF and that FCF is rapidly declining. Over the past three years the firm has incurred $1.1 billion in stock-based compensation expense. 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.
However, upon closer look, Dropbox’s free cash flow fails to reflect the true economics of the business. Over the past three years, Dropbox states it generated $1.3 billion in free cash flow (FCF). Having to charge users for services they can get free from competitors with whom they’ve already integrated puts Dropbox in a very poor competitive position.įigure 4: Dropbox & Competitors’ Cloud-Based Storage PlansĭBX Expenses As Percent Of Revenue New Constructs, LLCĭropbox stated in its 2Q20 earnings call that it is on a trajectory to achieve its long-term free cash flow target of $1 billion by 2024. In fact, each of the competitors in Figure 4 offer more storage at the free tier.
Consequently, these firms can offer cloud storage for free and still make plenty of money while Dropbox must make money on cloud storage.įigure 4 shows that Dropbox offers neither the most storage nor the cheapest storage (excluding free tiers). Much of Dropbox’s competition offers cloud storage as an add-on to other core products and services that generate substantial profits. Inferior Offering at Higher Cost Limits Growth 20% of iCloud customers were paying users in 2018, the last time Apple shared that stat. Meanwhile, Box (BOX), a direct competitor, had ~13 million paying users out of just 71 million registered users, or 18%, as of 2Q20. Dropbox has over 600 million registered users, but as of 2Q20, just 15 million (or 3% of registered users) were paying users. If Dropbox cannot outgrow the competition in such a favorable environment, will it ever?Īdditionally, Dropbox has not been nearly as efficient at converting free users to paid users. By comparison, Google Cloud’s revenue increased 43% YoY in 2Q20, and Microsoft grew its commercial cloud revenue by 39% YoY over the same period. Dropbox saw only a 16% YoY revenue increase in 2Q20 and a 17% YoY increase in 1H20. On the contrary, it is losing ground to the competition. 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. This WFH Solution Provider Saw Market Share Decline During COVIDĭropbox’s share of the global cloud storage market has fallen from 4.4% in 2017 to 3.6% in 2019 as more competitors enter the space and existing competition ramped up storage options. Dropbox not only has to convince customers not to use Apple’s convenient and competitively-priced service, but it also must convince them that Dropbox’s service is meaningfully better. Furthermore, each of these users may find Apple’s new Apple One subscription (which bundles iCloud, Music, TV, Arcade, Fitness, and News) more appealing than a third-party service. DBX Users Vs Competition New Constructs, LLCĭropbox is at a disadvantage when it comes to competing for its competitors’ users.įor instance, Apple offers all of its customers 5 GB of free space through iCloud.