For ROIC members wondering my thoughts on Ethereum, now that it’s broken $600, I wrote a little about it in last night’s Making Cents so check that out. I own some that I bought back in early 2017, think it can do well in the near-term, but am much less confident about the network’s “dominance” longer-term like I am with Bitcoin.
I am considering adding Dropbox ($DBX) to the ROIC Big Board during the holidays as I do more work on the stock. $DBX screens really well as a value stock at 10.5x forward EBITDA with a 5.5% free cash flow yield as it’s become an unloved technology stock recently.
During their presentation last week, Dropbox’s management team projected that they will continue double-digit revenue growth, increase operating margins, and double free cash flow by 2024. They believe that executing on this strategy will bring the stock back into favor.
That sounds intelligent and conservative, but tech investors crave growth and the internet operates in a way where there are only a few market share winners. By that logic, they should be worried about reinvesting those cash flows into building out the platform, adding features, and acquiring more users. The bear case on this stock is that this is a value trap and they are on the technological market share decline. It’s a very sticky product, but if they don’t rejuvenate product-market fit, it will be a losing battle as time goes on.
Still, it’s hard to ignore the fact that they are trading for such a low valuation yet can provide profitable double-digit growth. At $19.00 per share, Dropbox is trading at a $6.9 billion valuation, about $450 per paying user, yet they make $128 in average revenue per user (ARPU). Conceptually, if they shut down and current users stayed for an average of 5 years, that would pay for the whole valuation. So Dropbox’s core cloud storage business is being priced to be stagnant.
Furthermore, this stock has upside potential with HelloSign, its e-signature product. Docusign ($DOCU) has 6x the valuation of Dropbox on an e-signature product alone. Yes, $DOCU has dominant market and mind share, but having used both products, e-signature platforms aren’t really inherently sticky and Dropbox could find HelloSign growth by being a low-cost alternative to the rest.