Dropbox is going to get interesting from here. We think the next leg in the stock is up (~20+%), as January 2017 price increases roll into revenue in 2018. To date, price changes have moved the needle some ~2% across 2017 (1Q17-4Q17 ARPU), but most contracts were grandfathered at 2016 prices in 2017, with major increases in the 50-60% range set for 2018. As the price increases become expressed in revenue, we are likely to see an acceleration of revenue and FCF capture above Street models.
The problem is that taking price on a prosumer base will likely cause a spike in paid user churn, which was already tracking to a low teens% rate. While the net will be revenue growth, a spike in churn would deflate the narrative that DBX is early in the monetization curve (we think middle innings), and erase the supposition by investors that DBX paid users will grow from ~11m towards some much larger footprint within the ~300m registered user base (the payable subset). Net, a surge in churn will re-rate the stock lower towards being valued on FCF, a big step down.
Our plan: stay Long for the price increases to make their way into revenue estimates but then gauge implied net user churn rates.
If you are a skeptic of newly issued equities, like we often are, you will not enjoy the timeline of the price increase = > IPO = > printing accelerated revenue growth on declining user acceptance qualities in a commodity market. The setup might make you think the price increases were designed to help pre-IPO investors sell, rather than to stimulate a healthy long term business model.
What was our unique insight? Carefully modeling user churn rates, backing into quarterly ARPU, and studying similar prosumer models that take price. The long term for DBX now looks more like cash cow who acquires rather than growth phenom. Thats a totally different valuation zone than where the stock is today.
Moving past the price increases, the rest of our analysis leans negative.
- Rising user churn on ARPU increases
- DBX much further along on monetizing the base than was advertised
- Equity no longer at a discount on historical
The best we can do, for now, on risk reward is +/-20% at current levels based on our FCF modeling. 2019 + 2020 may have additional positive surprises beyond surprising revenue growth, FCF, and margins.
Net we still see ~20% upside from current levels on the fundamental thesis of price contracts positively affecting 1H18 revenue growth.
Beyond our +20% view we will run into some problems.
Taking Price + Rising User Churn = Business model has a timestamp
Dear DREW: PIVOT NOW. Your opportunity is IAAS. Consider the case:
- Your marketing document is the S-1 which shows a ~$40m drop in absolute COGS from 2015 to 2017 despite the platform rising from 500PB to 1.1EB in that timeframe. Other IAAS providers may not be able to compete.
- You have purpose-built and totally unique storage technology
- You can ingest PBs of data faster than almost anyone with no service interruption
- You crush AWS on cost per PB
- (And you can leap tall buildings in a single bound)
If you are successful at entering the enormous and fast growing IAAS market via the storage AAS product there is no limit to how far and wide your product and market growth can be. There will be no need to try to compete with Slack or GDocs using a lesser product (sorry). Trust me: taking price on a declining prosumer base that was originally built with viral efficiency is a hard path. Virally built can = virally destroyed. And investors will not offer up huge multiples for high churn businesses.
