Market Performance
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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!
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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.
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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.
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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.
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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.
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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).
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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.
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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.
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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.