|Shares Out. (in M):||407||P/E||0||0|
|Market Cap (in $M):||9,988||P/FCF||25.2||20.8|
|Net Debt (in $M):||0||EBIT||0||0|
This is idea undeniably skews more towards the “growth” side of the growth/value spectrum. If you are not into that, sorry for the wasted "click".
Dropbox (DBX) was founded in 2007 by current CEO, Drew Houston, and Arash Ferdowsi to tackle the difficulties associated with file storage, synchronization, and security. The origin story goes that Houston was traveling on a Chinatown bus between New York and Boston and became frustrated with his inability to access his files after forgetting his thumb drive. Over the ensuing years DBX quickly rose to Silicon Valley unicorn-status becoming the fastest SaaS company ever to reach $1bn in sales. The company came public in March of 2018 at around $30. Since then the stock has been a dud, currently trades at a wide discount to peers, and, in my view, presents an attractive GARP-y risk-reward at ~$24.
The core functionality of Dropbox’s platform allows users to save and store content in the cloud and access it from anywhere on any device. This enables geographically dispersed teams to organize work in a single cloud-based location and for larger organizations to get rid of the unwieldly traditional “lettered” file server. Over the years, the company has evolved from focusing on just cloud storage to broader business use cases and collaboration functionality. Longer term the company seeks to address the problem of content fragmentation, i.e. it is easier to search all human knowledge on Google than it is to find a sales proposal buried away somewhere in SharePoint. From the company’s S-1:
“According to a 2016 IDC report, more than half of companies ranging from 100 to 5,000+ employees use at least three repositories for accessing documents on a weekly basis”
“The combination of scattered content, fragmented tools, and fluid team structures has led to decreased workplace productivity. According to a report by McKinsey & Company, knowledge workers spend approximately 60% of their time at work on tedious tasks such as searching for content, reviewing email, and re-sharing context to keep team members in the loop—what we call “work about work.”
The company rapidly took share in the $5bn file, sync, share market due to its lightweight but powerful product with an intuitive and elegant user experience. DBX has since rolled out several new products to expand into the larger collaboration and productivity market. These include:
· Paper- a collaboration workspace that enables lightweight task management and co-authoring functionality.
· Showcase- a professional sharing product that provides users a way to present their work to clients and business partners through a customizable, branded webpage.
· Smart Sync- a feature that allows users to access all of their DBX content on their computers without taking up storage space on their local hard drives
· Admin controls- team administrators can customize security settings, such as sharing permissions, remote device wipe, audit log, device approvals, tiered administrator roles, directory restrictions, disabling download links, and network control
· HelloSign- DBX just announced the acquisition of HelloSign for $230m. HelloSign is an e-signature tool and competes with DocuSign and Adobe EchoSign. This deal adds a nice product to the platform and demonstrates DBX’s ambitions to become a broader business workflow technology company.
The company utilizes a freemium model with several different price plans for individuals and teams.
Today, the company has 12m+ paying users and over 500m registered users across 180 countries. The platform houses over 400bn pieces of content and 1.2bn files that generate over an Exabyte of data. More than 80% of paying users use DBX for work cases. The company counts global brands such as Expedia, HPE, Adidas, and News Corp as customers and has over 56% of Fortune 500 paying for DBX Business. Business Teams account for 30% of the overall user base, up from 20% three years ago. 40% of the 300k Team customers have at least 1 member that was previously an individual subscriber.
Issues since IPO
There are a few factors aside from general market volatility that contributed to the stock’s underwhelming performance since the IPO. First, the company came public at a valuation below where it raised money in 2014. This likely fed the perception that the company was running out of steam. Second, coinciding with the company’s 2Q earnings release, DBX reported that COO Dennis Woodside was stepping down. It is my understanding that Woodside felt that he accomplished what he set out to do at DBX and had ambitions to move to a role where he could run the show rather than be a COO. In the same earnings release the company flubbed messaging around its lock-up expiration making it seem like it was changing and pulling forward the expiration date. In the S-1, the company explains that the lock up period will last 180 days unless that date falls within a quarterly blackout period in which case the lock up would end ten trading days prior to the start of the blackout period. That is indeed what happened, and the company could have done a better job explaining the disclosure. These items weighed on sentiment and overshadowed a couple quarters of strong fundamental performance. I think these items will prove transitory and are more than baked into the current price.
Why own the stock?
Benefits of Scale
The company’s scale provides a significant advantage both in providing an opportunity for upsell/conversion and for providing insight into customers workflow for new product development. My thesis rests on DBX’s ability to monetize and upsell its massive user base. The company’s consumer-grade and easy-to-use product led to viral adoption across 500m active users. The huge repository should provide fertile hunting grounds to convert free users to paid and upsell paying users into higher priced SKUs. DBX has real-time insight into how its users are engaging with the platform and the company can use this data to optimize its conversion engine and sales efforts. For instance, DBX’s software can identify that a user is also a Salesforce customer and then deploy an in-product prompt about the advantages of DBX/Salesforce integration available in paid tiers. The immense free user funnel enables the company to run hundreds of data science experiments to identify patterns in usage that may lead to conversion opportunities. Examples of experiments span from simple things like changing search engine key words or changing the color of the buy button in the Dropbox app to more sophisticated incentives to convert or up-sell users. The company believes that 300 million of its users have at least one characteristic (i.e. registered using a business domain email) that makes them a qualified target to pay over time. Compared to the 12.3m paying users currently, this is a very large number and strikes me as a bit pie in the sky, but nonetheless the free user base should provide a very long runway for conversion opportunities.
DBX has a unique sales process. Adoption in an organization typically begins organically. Drawing upon its consumer roots, the company markets and sells to end users rather than corporate IT departments. It can then detect once the platform hits a certain threshold usage within an organization to warrant an outbound sales effort. The sales pitch is then like getting the ball on the opposing team’s 20-yard line. The conversation with the IT department/CIO starts with, “All these people in your organization are using the product, upgrade to a Team SKU to get better admin control and security features” rather than “Here is why you should think about implementing this in your organization…”. The company notes that it has at least one paying individual in greater than 90% of the Fortune 500 which provides a solid beachhead for broader expansion. The below graphic illustrates the company’s adoption trajectory.