Dropbox [DBX] earnings for the second quarter of 2019 were a mixed bag. At $401.5m, total revenue was up 18% on the same period last year and beat the $400.9m that was, according to Refinitiv, expected by analysts. The report that came after the bell on 9 August, also beat analysts’ estimates for earnings-per-share at $0.10, versus the expected $0.08 for the quarter.
However, the firm’s net losses widened to $21.4m at $0.5 a share, from $4.1m, or $0.1 share, for the same period a year earlier. The report also showed that Dropbox missed analysts’ estimates on one crucial growth indicator – average revenue per user came in at $120.48, compared to analysts’ estimates of $120.8.
Dropbox's net losses - increasing from $4.1m a year earlier
This is a big issue for Dropbox as the firm is not yet profitable and, despite the number of paying users increasing to 13.6 million, compared to 11.9 million for the same period last year, the estimate miss showed the proportional increase of paying users was lower than analysts had hoped for. Less than 3% of Dropbox’s 500m plus users currently pay for the service, according to the Wall St Journal.
The miss proved to be a massive red flag for investors, who quickly exited or reduced their holdings in the stock. The share price plummeted close to 13% the day after the earnings were announced, to an all-time low of $18.71; 35.5% off its March 2018 IPO price of $29.
Amount of the 500m+ Dropbox users who currently pay
What happened next?
Dropbox shares continued to slide a further 7.75% over the next four days, to the stock’s now current all-time low of $17.26. Since then, the stock has gone on to rebound 21.84% to reach $21.03 by Friday 20 September.
What were the rebound signs and reasons?
The stock declined so rapidly, its Relative Strength Index (RSI) score broke below 20 between 12 and 15 August, which suggested the stock had become oversold and could be in for a rebound. By 19 August, the RSI was back above the 20 mark and, as of 20 September stands at 66, suggesting the stock is neither over- or under-sold.
Despite Zacks Investment Research downgrading Dropbox from a ‘buy’ to ‘hold’ on 15 August – the day before the rebound began – most analysts maintained a buy rating for the stock, with a slightly reduced price target.
Bank of America Merrill Lynch analyst Justin Post maintained his buy rating the day after the release, with a price target of $33 in a note to investors.
A buy rating was also maintained by DA Davidson analyst Rishi Jaluria, who lowered his price target for the stock to $30.00 from $36.00.
Dropbox’s next earnings report due in November is now crucial for the company to show growth in paying users in order to maintain momentum in the stock price.
|Operating Margin (TTM)||-4.94%|
|Quarterly Revenue Growth (YoY)||18.40%|
Dropbox share price vitals, Yahoo Finance, 25 September 2019
Some analysts, however, argue that due to Dropbox’s need to monetise users, it will be difficult for the company to remain competitive in the future against the likes of cloud giants Microsoft [MSFT] and Amazon [AMZN], which are much more easily able give away similar services for cheaper, or even free.
David Trainer founder of New Constructs believes Dropbox to be part of a cohort of ‘micro-bubble’ stocks also including Tesla [TSLA], Spotify [SPOT] and Netflix [NFLX] which have not turned a profit and so are hugely overvalued.
“Dropbox faces a clear disadvantage versus MSFT and other major competitors. The company charges for a product, cloud storage, that its much larger competitors can offer for free, or at much lower prices. This competition and lack of pricing power manifests in Dropbox’s after-tax profit (NOPAT) margins, which are highly negative since going public, and currently sit at -20%,” Trainer recently argued in a Forbes article.
Of 15 analysts tracked by CNN that have issued ratings on Dropbox, 10 rate the stock a ‘buy’, three rate it a ‘hold’ and two rate the stock ‘underperform’.
For CMC Markets analyst David Madden, the stock is unluckily to rally in the short term, however: “The stock has been pushing lower since mid-July, and while it remains below the 50-day moving average at $20.72, the wider bearish move should continue, and it might target $17.20,” he says. “A rally might encounter resistance at the 200-day moving average at $22.52.”
“The stock has been pushing lower since mid-July, and while it remains below the 50-day moving average at $20.72, the wider bearish move should continue, and it might target $17.20” - CMC Markets analyst David Madden