As a file hosting service offering cloud storage, file synchronisation, personal cloud and client software, Dropbox stock has been one of the primary beneficiaries of the pandemic. Since the end of March last year, shares in the company have increased in value by around 70%.
The pandemic has completely changed how companies and employees live and work worldwide. Some estimates suggest that the world has gone through around a decade of technological change in just a few months.
The significant increase in remote working and collaboration and the rapid digital transformation seen across businesses in every industry is leading investors to ask is Dropbox a good investment and should I buy Dropbox stock?
Fundamentals of Dropbox stock
It is now commonplace for employees and employers to share and work on documents online. This has dramatically changed many industries, which previously relied on pen and paper and other outdated modes of communication and document storage.
Dropbox stock has surged as users have moved to its platform. According to the company’s fourth-quarter results release, revenue increased 13% year-on-year in the fourth quarter of 2020. The number of paying users using the company’s platform increased to 15.5 million, up from 14.3 million at the end of 2019.
While these figures look impressive, the company’s revenue growth slowed in its 2020 financial year. Revenue increased 15% overall, compared to 19% in 2019 and 26% in 2018.
Currently, as of August 2021, Dropbox stock is $32.3, a recent 3% increase after releasing its second-quarter results and has a market cap of $12.87B. Stock prices a year ago sat at $19.64, which shows a steady growth on today’s stock price.
To attract more paying consumers to its platform, the company has been adding features over the past few years. Towards the end of 2020, the group launched Vault, which adds an additional layer of security to sensitive documents. In 2019, Dropbox integrated the electronic document signing service HelloSign.
The company’s latest acquisition is DocSend, a secure document-sharing and analytics platform.
What is the bull case for Dropbox stock?
DocSend is a high-tech solution to the problem of getting multiple users to sign a document in the most secure way possible while allowing the document owner to retain some level of control.
Users can enable sign-in verification, control download capabilities, and easily require viewers to sign nondisclosure agreements. It also provides real-time analytics into who is viewing each document.
With 17,000 users compared to Dropbox’s 525,000. The offering will help complement the group’s HelloSign product as well as Vault, which should help convince users about Dropbox’s security credentials.
Acquiring DocSend may help improve the overall attractiveness of the Dropbox platform. This could help reduce customer churn.
In conjunction with the rest of its holistic suite of collaboration tools, Dropbox has the potential to take market share from its larger competitors by offering something different and more diverse. It would also allow the business to reduce marketing spending.
This latest acquisition is unlikely to be Dropbox’s last, earlier this year Dropbox announced a $1.3 billion fundraising through convertible senior notes. Along with the $1.1 billion in cash and short-term investments already on its balance sheet, this should amount to almost $2.5 billion in liquidity. This gives the company plenty of firepower to both pursue acquisitions, or invest in research and development.
Management has also recently announced a $1 billion share repurchase program. However, in the past, management has been buying back Dropbox stock to reduce dilution from employee share options.
The group repurchased nearly $400 million in shares throughout 2020. Its number of outstanding shares increased almost 1% in 2020. Stock-based compensation expenses consumed 14% of revenue in 2020.
What is the bear case for Dropbox stock?
The main problem facing Dropbox stock right now seems to be competition.
Founded in 2007, Dropbox is one of the best-known cloud storage companies globally, it is facing fierce competition from competitors such as Microsoft, Alphabet, and Amazon. Because of their size, all of these companies can provide a better service for customers at a lower cost, which could impact the long-term success of Dropbox stock.
Ancillary services such as Microsoft Office or Google’s flagship search engine subsidises cloud storage for customers. Dropbox does not have this advantage. Its figures show just how expensive operating in this industry is without a cash cow to cover losses. Dropbox has remained unprofitable by GAAP measures ever since its IPO in 2018.
It posted a net loss of $256.3 million in fiscal 2020, compared to a loss of $57.2 million in 2019, mainly due to non-recurring real estate impairment charges in the fourth quarter. The company’s net loss widened to $345.8 million in the three months ended December 31, from $6.6 million last year.
Should I invest in Dropbox stock?
It seems unlikely that the acquisition of DocSend will dramatically improve the performance of Dropbox and the company’s shares in the near-term.
However, the additional functionality gives the company a bit of an edge over its larger competitors. In the viciously competitive cloud storage market, every advantage matters.
There could be further acquisitions on the cards as well from the company over the next few months. Additional products would add to the Dropbox offering, which may further improve customer retention and profit margins.