Dropbox, Inc. co-founders Drew Houston and Arash Ferdowsi got checks for about $15,000 from seed stage investment firm Y Combinator when they started working on the idea of the cloud storage in 2007. 11 years later and after surviving market wars with the likes of Google, Microsoft, and Amazon – Dropbox debuted as a public company with a value of about $12 billion by the end of its first trading day.
Dropbox was a glimmer of hope on Wall Street as it’s successful IPO erased the bitter aftertaste of the SNAP IPO from 2017. The stock gained 36% on top of its $21 IPO price and the company continues holding on to its gains with Dropbox stock price around $30 as at the time of writing. However, despite the decent success that the firm recorded in its IPO, Wall Street remains divided about the prospects of business going forward. This piece provides insight into the bullish and bearish case for Dropbox going forward.
The bullish case for Dropbox
- Consistent growth
The first reason to be optimistic about the prospects of Dropbox is its impressively consistent growth over the years. The firm has more than 500 million registered users and more than 11 million users who delivered more than $1.1 billion GAAP revenue from more than 180 countries. The firm is also positioning as an important tool for enterprise clients as it reports that about 92% of Fortune 500 companies have a paying Dropbox user within their organization and while 56% of those companies have at least one paying Dropbox Business account.
In the chart below, the company reported that the number of paying customers in “the monthly subscription amount generated by the January 2015 cohort doubled in less than three years after signup”. Dropbox revenue can record a significant uptrend if the company continues to maintain it’s growth rate and if it continues to convert its free members into paying members.
- Proactive management
Another factor supporting the bullish case of Dropbox is the ability of the founders and management team to execute on crucial technical decisions. In 2016, Dropbox completed a multiyear project to stop using Amazon’s Simple Storage Service (S3) in favor of its own infrastructure. Within 2 years of the move, Dropbox has saved $75 million in operating costs, and it proactively saved hundreds of millions that it would have needed to spend as its business continues to grow.
However, the more impressive thing about Dropbox’s ability to execute on technical decisions is the innovation (as explained in the company’s blog post) behind the data migration. Dropbox succeeded in moving one exabyte (one quintillion bytes) of data from AWS to its own storage infrastructure without losing one bit and without any noticeable disruption of service to users.
The bearish case for Dropbox
Despite the fact that Dropbox is currently a Wall Street darling, it would be grossly irresponsible to ignore some of the red flags in the company’s business and some big possibilities expressed in its SEC filing.
- Profitability seems to be elusive
To begin with, Dropbox has never posted a profit. In 2016, the company reported net losses of $112 million, it posted losses of $210 million in 2016, and it reported losses of $326 million in 2015. Of course, its losses have been on a constant decline in the last three years as its revenue continues to increase and the firm did report that it became free cash flow positive in 2016. Nonetheless, there are some significant differences between “free cash flow” and “cash flow”
More so, there’s no denying the fact that Dropbox is still struggling to increase its ARPU significantly. In 2015, the company’s ARPU per user was $113.54, its ARPU dropped to $110.54 in 2016, before only rising marginally to $111.91 in 2017. In fact, the firm has warned investors that “an increase in users could result in our recognition of more costs than revenue in the earlier portion of the subscription term. We may not attain sufficient revenue to maintain positive cash flow from operations or achieve profitability in any given period.”
- The competition is tough
Lastly, the competitive environment in which Dropbox operates is still very fierce and keenly contested by the biggest names in tech. CEO, Drew Houston notes that “we’ve always been in a competitive environment even going back to 2011.” The firm competes with Google , Amazon , Microsoft , and rival Box Inc. The problem, however, is that its biggest competitors are focused on a freemium model that is focused on selling to enterprise clients. Dropbox is still hoping that it will convert its free users to paying users someday – that day may never come, and its rivals could have taken over the enterprise market by the time it attempts to pivot.
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