Investors store Dropbox share price ahead of earnings

Since making its debut on the markets in March 2018, Dropbox [DBX] has been a key player in the software as a service (SaaS) space.

But only recently has the cloud storage company been thrust into the spotlight, benefitting from the increased demand for cloud platforms, software and productivity tools amid social distancing measures.

Before the start of the year, the stock had been on a downward trend, ending 2019 down 57% from its all-time high of $42 on 18 June 2018.

However, while shares in Dropbox have not been spared from the extreme volatility of the market downturn, they have been fighting to claw back gains.

The stock climbed 25% up until late February 2020, reaching a high of $22.45 on 21 February before wiping out most of those gains and falling 23% to a low of $17.11 on 23 March. Since then, the stock has rebounded alongside the broad market uptick, gaining 22% to close at $21 on 30 April.

With the company expected to announce its first-quarter earnings later today, will its stock be set for a post-earnings bounce? 

Bullish bets for earnings beat

Analysts are expecting a strong showing ahead of Dropbox’s earnings announcement, as many assume that the high demand for storage capacity and productivity solutions will drive earnings upwards.

The San Francisco-based company had forecasted revenue to be a in a range of $452m to $454m in its fourth-quarter report, which would represent a 17% and 18% year-over-year growth respectively. At the time CEO Drew Houston said he was “confident in the team we have on board and the opportunity ahead”.

Daniel Martins, founder of research firm DM Martins Research, notes that the implied top-line increase would be roughly in line with the company’s growth rate over the past few quarters.

It also put out guidance for full-year 2020 to be in a range of $1.8bn to $1.9bn, representing a 14% to 15% year-over-year growth.

Zacks Equity Research has the company’s first-quarter revenue consensus pegged at $452m — the lower end of its guidance — but notes that Dropbox beat earnings estimates in the last four quarters. The research firm has a trailing four-quarter positive earnings surprise of 31% on average.

Despite the consensus that Dropbox will beat, Martins is concerned that the bar has been set too high. “[The fourth quarter] seems to have marked a bottom-line inflection point and the company will be pressed to maintain optimism towards margin expansion and cash flow generation,” he writes in Seeking Alpha, also noting the stock’s long-term underperformance.  

Martins believes investors should watch for any improvement in the firm’s operating margin rate. The firm had set a target rate of between 28% and 30% by 2024.

Other factors to watch include retention in existing users, as the company’s efforts in product innovation through the introduction of new features such as Dropbox Spaces, Paper and Extensions are likely to have helped, notes Zacks.

Furthermore, its paying user base is set to grow off the back of integration with leading platforms such as Zoom [ZM], Slack [WORK] and Atlassian [TEAM] as well as its partnership with BetterCloud.

“However, increasing investments in product enhancements amid stiff competition from services like Microsoft One Drive, Google Drive and Citrix ShareFile are likely to have impeded margin expansion in the first quarter,” the publication noted.

“However, increasing investments in product enhancements amid stiff competition from services like Microsoft One Drive, Google Drive and Citrix ShareFile are likely to have impeded margin expansion in the first quarter” - Zacks Equity Research

A long-term buy

Valued at $8.5bn as of 5 May close, Dropbox is an expensive buy considering it isn’t profitable yet. Data projections by Simply Wall Street estimate that the company will become profitable in the next three years but with revenue forecast to grow 1.1% faster than the US market, investors are taking a long-term view.

Indeed, by the end of the fourth quarter, 46 hedge funds reportedly held long positions on the stock, according to data by Insider Monkey — a 10% uptick from the previous quarter.

Renaissance Technologies and DE Shaw, which had stakes of $315.2m and $104.5m respectively, held the largest two positions, Insider Monkey’s Abigail Fisher writes. 

She notes that compared to other cloud service stocks, Dropbox was the most popular among hedge funds.

As it stands, the stock has an average overweight rating with a price target of $27.08 among the 15 analysts polled by MarketWatch.

The exponential increase in work-from-home productivity may be tied to the pandemic, but whether it turns out to be a permanent trend will be vital to the long-term attractiveness of Dropbox.

Dropbox share price vitals, Yahoo Finance, 6 May 2020