Quick Value 10.5.20 (DBX)

Dropbox Inc (DBX)

Market Performance

More pain in the energy space with oil solidly below the $40 mark… Shares of the Energy Sector ETF (XLE) down just shy of 50% YTD still…

Other indices had good weeks but they’re still about flat over the last month+

Market Stats

Personal Income and Spending report for the month of August came out…

The “bonus” unemployment has been reduced as of 7/31 and the effects are evident in August with unemployment wages dropping from ~$1.3tn rate to $630bn. PPP funding ran its course months ago and yet hiring and wages continue to rise.

Despite that, wages are still higher than pre-COVID times!

Spending and savings are the remaining pieces of the equation here. Spending is down but continues to rebound from March lows.

Savings rates are still much higher than pre-COVID levels.

Here’s a look at income and savings from Jan 2018 to Aug 2020… Clearly showing that wages are improving despite the COVID setback. Consumer finances have benefitted from stimulus efforts.

The next big release was the jobs report for the month of September…

In the month of September, 661,000 jobs were added and the unemployment rate dropped to 7.9%

At an unemployment rate of 7.9%, we’re now well off the COVID peak at 14.7%. And looking back to the financial crisis, we’re at the equivalent of September 2012 — a full 3 years following the end of that recession.

Quick Value

Dropbox Inc (DBX)

This is the well-known digital file storage company allowing a group of free and paid users to access files from multiple locations.

As of 2Q20 they have 600m or so registered users and 15m paying subscribers.

It’s a pretty good product with a good approach. Dropbox has embraced the open ecosystem idea and is attempting to partner with other software providers like Slack and Google to integrate seamlessly with the app.

The strategy is shifting from being just cloud storage (what I view as a commodity) to being a player in the future cloud workspace. Everybody has their own preference for their favorite apps and in most cases only a few players are trying to build a suite of products for all uses (Zoho, Google, Microsoft, etc.) — this makes it imperative that future “winners” in their use category be collaborative / integrate easily with other popular apps. Very few people are going to adopt a new spreadsheet program different from Excel or Google Sheets.

They’ve been working to add useful features too — vault (password manager), an app center for third-party programs, and in 2019 they acquired e-signature company HelloSign.

Some financial info…

There are about 415m shares outstanding and a $19 stock price = $7.9bn market cap. They have >$1bn in cash on hand and no debt for a $6.8bn enterprise value.

This has been a growing business since going public in 2018. Revenue growth for the past few periods:

2018 — 26% revenue growth
2019 — 19%
1H20 — 17%

It’s also been a profitable business too (sort of)… GAAP net earnings are still negative but operating cash flow has been positive, thanks in part to large stock-based compensation and deferred revenue (users paying upfront for future services).

So you’ll probably need to factor in some dilution when looking at this one…

Recently, Dropbox has started to repurchase shares in a more meaningful way. But only in the past few quarters has share count started to move downward. Maybe nearing the hump of repurchasing more than issued.

They’ve laid out a nice long-term target financial model of solid gross margins in the 80% range (it is a SaaS business after all) and $1bn+ in free cash flow.

I think the key question here is why should a stock like this trade at a “low” revenue multiple of ~3.8x (ev to sales) vs. some larger SaaS players like Slack, Salesforce, Smartsheet, etc. in the 11x to 20x range. Growth rates matter but this is a stark difference.

Another “one dimensional” software player, DocuSign, to which Dropbox has a competing product in HelloSign, carries a 35x revenue multiple! A $40bn market cap (compared to Dropbox at <$8bn) with ~$1.2bn in revenue (compared to Dropbox at $1.8bn. Another example is Atlassian Corp (TEAM), owner of apps like Jira and Trello, sports a similar revenue level to Dropbox at $1.6bn but has a $45bn market cap to that of Dropbox at $8bn.

I haven’t dug into the differences between these software businesses to truly understand why Dropbox would deserve a lower multiple than peers.