Dropbox Is Doing Well, But Appears Overvalued In The Face Of Industry Headwinds

Dropbox recently reported its performance figures for the first quarter of the year – the cloud storage company’s first ever quarterly results announcement since it went public in March – and it did not disappoint. The company’s continued push into the enterprise storage space has helped total number of paid users increase to 11.5 million (from 9.3 million a year ago) – in turn helping revenues for Q1 2018 jump a good 28% compared to the figure a year ago.

While Dropbox remains poised to report strong revenue growth over the coming years thanks to a sticky customer base and the proven simplicity of its file hosting service, the company’s Q1 results also highlight the impact of increasing competition on its bottom line. Notably, the company’s loss for the quarter was $466 million (compared to a loss of $33 million in Q1 2017) primarily because sales, general and marketing (SG&A) expenses nearly tripled. While the company’s IPO process would have added to these costs in Q1, the year-on-year increase in costs was primarily because of Dropbox’s intense competition with deep-pocketed tech giants like Microsoft, Google and Apple. And this situation is clearly not going to get better in the future, as these competitors have the added advantage of being able to bundle their file-sharing service with other offerings. Dropbox will therefore have to continue to spend huge sums of money each quarter to attract new paying customers.

This does not bode well for Dropbox’s long-term growth potential, and is the reason why we estimate that the company’s shares are worth around $27 based on our interactive model for Dropbox. Our price estimate is about 15% below the current market price, and implies a market cap of roughly $11 billion.

We arrive at our price estimate of $27 using just 4 core value drivers for the company:

• No. of Active Users: This is the total number of users active on Dropbox, with a majority of them using Dropbox’s services for free. Dropbox currently has more than 500 million users – a figure we forecast to reach 540 million by the end of the year
• Proportion of Paying Users: We use this metric to estimate the total number of users paying for Dropbox’s services (individual users with premium subscription licenses, and corporate users subscribing to Dropbox Business). The proportion of paying users has increased from under 1.4% in 2015 to 2.1% in 2017, and we expect it to reach 2.4% by the end of 2018

• Revenue Per Paying User: This is the average revenue Dropbox generates per user paying for its services, which allows us to estimate Dropbox’s total revenues for a year. The average revenue figure has nudged steadily higher from $93 in 2015 to $101 in 2017, and we expect it continue this trend to reach $106 in 2018.

As detailed in the chart above, we expect Dropbox to generate revenues of about $1.4 billion in 2018. We apply a revenue multiple of 8 for Dropbox, based on the following:

• Forward revenue multiples for the sector are in the range of 7 – 8
• Dropbox has built a sizable user base globally thanks to its easy-to-use file transfer service, which the company has been able to integrate into various platforms over the years. However, it competes with the largest tech firms in the world, many of which offer file-sharing as an add-on service to their core offerings. This will likely weigh on Dropbox’s growth in the long run
• Additionally, Dropbox currently provides the lowest storage per dollar compared to Google, Microsoft and Apple. Because of this, it is likely to lower its fees in the near future – something that will affect the top line going forward
• Taking this into account, we believe that a revenue multiple higher than 8 is not appropriate to value Dropbox for now

As shown above, this works out to a figure of about $11 billion for Dropbox’s total value. Assuming an average of 407 million shares for the year, this works out to a price estimate of $27 per share of the company – roughly 15% lower than the current market price.

Disagree with our forecast? Feel free to come up with your own valuation for Dropbox by making changes on our dashboard.

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