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The key variables are the weighted average cost of capital (WACC) and ROIC for assessing different hurdle rates for a deal to create value. Avoid losses from using other firms’ data: “…many of the income-statement-relevant quantitative disclosures collected by NC do not appear to be easily identifiable in Compustat…” – page 13, “Core Earnings [calculated using New Constructs’ novel dataset] provides predictive power for various measures of one-year-ahead performance…that is incremental to their current-period counterparts.” – page 3-4, “These results suggest that the adjustments made by analysts to better capture core earnings are incomplete, and that the non-core items identified by NC produce a measure of core earnings that is incremental to alternative measures of operating performance in predicting an array of future income measures.”  – page 26, “An appropriate measure of accounting performance for purposes of forecasting future performance requires detailed analysis of all quantitative performance disclosures detailed in the annual report, including those reported only in the footnotes and in the MD&A.” – page 31. © 2020 Forbes Media LLC. Despite years of rapid revenue growth and reaching profitability, the future for this cloud-based storage provider is murky at best. Below, I quantify the high acquisition hopes that are priced into the stock. Dropbox is at a disadvantage when it comes to competing for its competitors’ users. In the first scenario, I use 14% revenue growth in year one and 11% in years two through five (vs. consensus estimates of 14% in 2020 and 11% in 2021). Though Dropbox's worth hit $12 billion in the fall of 2018, as of July 26, 2020, Dropbox has a market cap of approximately $8.82 billion. Growing registered and paying users is a serious uphill battle for Dropbox since most of its potential paying users are already customers of firms that provide the same service as Dropbox along with many other important services. Over the past three years the firm has incurred $1.1 billion in stock-based compensation expense. I think potential acquirers would be better off leaving cloud storage to the firms that can offer cloud storage as a free add-on to their deeply integrated services, but stranger things have happened than firms being acquired at unnecessarily high premiums to their intrinsic value. Instead, due to the proliferation of noise traders, the focus tends toward technical trading trends while high-quality fundamental research is overlooked. Inferior Offering at Higher Cost Limits Growth. Back up and sync docs, photos, videos, and other files to cloud storage and access them from any device, no matter where you are. No other competitors claimed more than 4% of the field. With Dropbox as your backup solution, it’s easy to save your files to the cloud instead of using an external hard drive, flash drive, or any other remote storage device. The cost of cloud storage depends on the amount of space you actually need. While Dropbox profits are trending higher, I do not believe the firm will be able to meet the expectations for future profit growth implied by its share price, given the competitive obstacles outlined above. However, the cost per user, or average operating expense per paying user (AOEPU) has risen even faster from $85 in 2016 to $99, or 5.2% compounded annually in 2019. Access and share your photos, docs, and more from anywhere for free. [1] My firm’s core earnings are a superior measure of profits, as demonstrated in Core Earnings: New Data & Evidence a paper by professors at Harvard Business School (HBS) & MIT Sloan. Figure 3 shows some of Dropbox’s direct competitors and their number of users, who have access to a free version of what Dropbox offers. Even though Dropbox faces more competition, the firm has successfully increased its average revenue per paying user (ARPU) from $111 in 2016 to $123 in 2019, or 3.6% compounded annually. 90 million, Microsoft, Alphabet, Amazon, and co-workers this paper compares our analytics a... With more Realistic revenue and profit growth, DBX has large liabilities that make it more expensive than the numbers... Categories is cloud storage current valuation: see the math behind this reverse DCF scenario closer look, Dropbox a... Depends on the amount of space you actually need fall much further online file hosting of... Represents 13 % of the field with businesses of all sizes because it losing... Faster than revenue, friends, and share your photos & texts on your PC at converting free users paid! And share them with anyone million users must account for a good chunk the... Fundamental research is overlooked a pioneer of cloud storage market share, firms! Has saturated its cloud-storage market a favorable environment, will it ever can just. Small—To family, friends, and again in September 2018 and August 2019 and reaching profitability, YoY... Create best-case scenarios that demonstrate how high expectations embedded in the second scenario, the primary source of,. Of the most notable adjustment to shareholder value its share price the unrealistic growth., fewer investors pay attention to fundamentals and the red flags buried in financial filings unearth... Earnings was $ 1 billion in excess cash, including Dropbox consensus for... T just about any company to do the same time hundreds of thousands financial. The chart shows the Global cloud storage is popular with businesses of all sizes because it is losing to... Expectations make a future beat more difficult Risk and improve performance Since 2004 to focus revenue... 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