Editor's Note: Our Technology analyst Ami Joseph is hosting an institutional call today on the Dropbox IPO. Email sales@hedgeye.com for access.
OVERVIEW
Dropbox (DBX) put up over 30% revenue growth in 2017 with OCF margins of 30% and $305m in FCF, putting the stock at a 3.8% FCF yield on a trailing basis at the latest ~$8b valuation. Most PMs will just thank Jobu for the gift, drink to his health, and buy all day long. We are probably inclined to join the parade as the combination of growth and value puts this one in some rare company. Think FB, GOOGL, etc.
But…well…there are some THINGS. There are some…let’s call them ‘Flags’ in the S-1 and roadshow (we can leave off the terms yellow or red...for now).
THE “FLAGS” INCLUDE:
1. Users: User growth has really slowed considerably. There is a strand here we will pick apart. It sorta has to do with: who does DBX want to be when they grow up?
2. Churn: The company boasts that the net revenue retention rate for business users is 100%, and over 90% on a blended basis for all paying users. They also boast that they are successful at migrating existing customers to higher value packages over time, in fact they demonstrated a 2x in the 2015 cohort of new customers. Do you see where we are going with this? If they are so good at migrating existing customers to higher value deals, shouldn’t net revenue retention be well north of 100%? When you combine points 1+2 you start to do some math on customer churn %.
3. Dropbox Paper: Half the roadshow was about Dropbox Paper. Yup, that—all famous, now dominant, awesome, amazing product lighting the world on fire—that no one has ever heard of. Paper is a product category about which the DBX CEO has made some starts, and stops, and seems to have re-started very quietly in 2017. If you are a DBX user, you probably have Paper included already in your basic subscription but – it’s a new product, still not getting great reviews, not getting great uptick, and yet they spent half the IPO roadshow talking about it? Drew, what happened to everything you learned from Andy Grove?
Ok, that’s enough for now. We are going to pull this entire thing apart. Best case scenario: we are buyers with eyes open. Worst case, it’s oy vey time.
More to follow.
