LOCK-UP ENDS TOMORROW
As detailed extensively in their Form 10-Q, the restricted period for DBX ends post close of market 8/23/18 (earlier than expected due to the company’s blackout period coinciding with the 180-day post-IPO mark set to hit on 9/18/18). Based on our understanding of the S-1, ~350MM shares will become eligible for sale, of which ~260MM shares will be held by company affiliates and subject to volume restrictions. Thus, the end of the restricted period should immediately add ~90MM shares to the float with the remainder added over time, subject to company volume restrictions.
NO SENSE OF URGENCY
We like the focus on collaboration and enterprise (as we detailed in our Pre-IPO Black Book Call, HERE) but based on everything we’ve seen, there is no rush among management to extensively and exhaustively target these segments. As neither of them are contributors to results in a material way today, this continues to be a wait-and-see story in the face of execution risk, rising churn, and rising competition.
CIRCUMSCRIBED MARKET OPPORTUNITY
Considering the high base of individual paying users, it is not surprising that we are seeing decelerating y/y % changes (from mid-30%s end of F16 to the 20% reported in the June 2018 Q) as the overall # grows. But, if there is such a big market opportunity for paying users and Dropbox is just scratching the surface in the free-to-paid conversion we should at least be seeing consistent (let alone, growing) # of paying user net adds. The fact that the net adds # has slowed from 500K-700K per Quarter to ~400K/qtr at a time when DBX is focusing greater efforts at encouraging this conversion could be an indication that there is a cap on the potential penetration of the free user base.
BOTTOMLINE
With a business model capped on growth upside (lower successive period net adds amid a full-on conversion effort of free-to-paid), revenue continuing to decelerate (even with rising ARPU), and strategies around enterprise & collaboration that are, so far, immaterial to EPS, we continue to see this stock heading for a re-rating from growth multiple to harvest multiple with downside risk of ~30%.
Please call or e-mail with any questions.
Ami Joseph
Managing Director
