The shares of this cloud-based storage company are getting lots of new analyst coverage: ‘Overweight’ at KeyBanc’ ‘Buy’ at Deutsche Bank; and ‘Overweight’ at PiperJaffray.
Dropbox, Inc. (DBX)
From Canaccord Genuity Research
We are launching coverage of Dropbox, Inc. (DBX) with a BUY rating, which we can justify based on likely periodic upsides to our forecasts driven by the firm’s strong position in document-based storage and collaboration.
More interestingly, we believe Dropbox could become one of the leading Next Generation Work Systems companies, which is a class of emerging cloud platforms that overlay foundational systems of record firms with software that helps people work smarter and more efficiently.
It’s a big problem and market. What started as cloud storage aimed at the consumer market has gradually and purposely morphed into an enterprise content management and collaboration platform. Modern workers demand tools that make their jobs easier; that means access to content on any device at any time, the ability to create and collaborate on content with teammates, and the means to easily share materials with others. This is precisely what Dropbox enables. Even narrowly defined, cloud storage and collaboration apps create a $30B+ annual opportunity.
Dropbox goes to market with a business model that marries consumer virality and scale with business software retention and margins. More than 90% of sales are generated by the firm’s powerful self-service conversion engine—users sign up organically, DBX’s 500M+ registered users act as the firm’s best salespeople to grow the network, and then data analytics are used to drive precision targeting for conversion/upsell. Today Dropbox has more than 11M paid users and business customers that span 56% of the Fortune 500, both of which have helped the firm scale to a better than $1.2B revenue run rate, up ~30%on a trailing basis.
Perhaps even more impressive than top line momentum is the fact that Dropbox is building its business with FCF margins north of 20%. Today the firm has gross margins better than 70%, spends less on sales & marketing than it does on development, and maintains >100% net dollar retention on business customers, which combined characterize a model built for profitable scale. Longer term, we see a path for this firm to generate FCF margins that should expand well into the mid-30% range.
While there are no guarantees, more often than not companies these days guide conservatively. While we do not expect knee-buckling upsides, we do believe the estimate bias is up—a discussion that we detail in the pages that follow. In any case, on multiple valuation methodologies, we believe Dropbox supports a BUY rating, and we are initiating coverage with a $35 price target.
Richard Davis, David Hynes Jr., Mark Belcarz, Canaccord Genuity Research, www.canaccordgenuity.com, April 17, 2018