On Friday, a sellside analyst placed a sell rating on DBX. There are many points of the thesis (as presented on TV) with which we agree but one critical point of disagreement: the analyst is forecasting a ~2.5% ARPU increase for 2018. Our evidence suggests that DBX successfully executed a ~60% price increase across the board for business users, which amount to ~30% of existing paying customers. Accounting for churn and various other factors, we are estimating 15-25% total ARPU growth in 1H18 Y/Y.
The factors of revenue growth for DBX thus include:
- Net paying user growth, trending ~2MM per year with total paying users currently 11MM
- Aggregate growth in usage for existing customers via increased storage or functionality which is a mid-teens % growth driver
- ARPU growth
Ignoring the ARPU element, our central thoughts on DBX meander towards their large strategic blunder in (so far) having missed their true calling: head to head with AWS in IaaS (Infrastructure-as-a-Service). The company has created a highly efficient and low-cost modern storage technology with important changes such as an end of the hot / cold data dynamic, re-imagined what is reliability, and has already executed the service level at a hyper-scale. Most important? Public filings show DBX has doubled total storage capacity in the last two years while also dropping absolute costs by ~10% thanks to the migration off of AWS S3 and onto their own storage platform. It might be the best marketing document ever in this regard.
Dear Drew: remember, AWS started with S3 (storage as a service) and only later added EC2 (computing as a service). Go down this path. It will open up new markets that are two orders of magnitude bigger than the market for Dropbox Paper.
Today, without the IaaS business model, we are LONG because revenue growth will show re-acceleration in 1H18 and will shatter Street models. Beyond that we see limits, as we have articulated in previous notes.
