If you’re old enough to remember the 1990’s, you probably remember the nascent years of the Internet and the World Wide Web. As businesses began to realize the commercial opportunities that it offered, online businesses of seemingly every type were springing up. The wave of invention and innovation that period fueled impressive growth in the latter part of that decade and gave berth to some of the biggest companies in today’s tech sector. Alphabet (GOOGL), Amazon (AMZN) and Cisco Systems Inc. (CSCO) are just a few of names that today you’d think of as the “600-lb gorilla” in their respective industries and that helped define the scope and breadth of the Web, and e-commerce as it exists today.
What I think some people – especially those who weren’t paying attention to the market during those years – tend to forget that what has come to be called the “dot-com boom” went “bust” in a big way at the turn of the century. While there are abundant examples of companies that emerged into the new millennium as viable, productive Internet-focused companies, there were far more that didn’t. During the “boom” years, it seemed like every week a new batch of Internet stocks were going public, with an interesting story to tell about their business, but very little in the way of fundamental numbers to actually indicate their model was productive. Many of those companies never actually reported a profit of any kind, much less actual revenues, relying instead on outsized growth projections to drive investor interest.
Why the drive down bad memory lane? Because it never ceases to amaze me how history tends to repeat itself. Twenty years later, we’re not talking about how the Web is going to revolutionize global commerce – e-commerce has become, after all, a regular piece of everyday life. Now, the talk is turning to the “gig economy” – meaning businesses and processes that are entirely Internet-driven. As the demand for Internet connectivity – especially on a mobile, wireless basis – increases, it’s easy to see a massive number of new companies sprouting up to capitalize. These are businesses that offer viable, useful services and solutions for a variety of consumer and business needs, as well as those that are being built to provide and support the 5G infrastructure that most expect to act as the backbone of the next technological leap forward.
That’s really exciting stuff to see, and it is fascinating to see creative, innovative minds introducing a wide range of choices to work with. The flip side, however is that while many of these companies may prove to be the Alphabet, Amazon, or Cisco of the next twenty years, we’ll probably see far more fail. Investing in the cutting edge of technological innovation means that while there is huge opportunity if you’re right, the risk you might have to absorb if you’re wrong could be even bigger.
Dropbox, Inc. (DBX) is a great example of what I mean. One of the elements of the gig economy that has been seeing phenomenal growth in recent years is the cloud storage segment. This is a niche that just a few short years ago didn’t exist, but was created by companies exactly like DBX. DBX was one of the earliest entrants and creators of this sub-industry, giving Web users a straightforward method for storing files and content on the Web and sharing it for collaborative purposes. It’s a great story, to be sure, and something that gave the company plenty of momentum into its IPO in April of 2018. Origin story aside, DBX also falls into the same category as a lot of those now-forgotten Web businesses of the dot-com era. Part of that is because as the viability of the business was established, much bigger players like Google, Microsoft, Amazon and Apple came to play, offering very comparable, and in some cases superior alternatives, including expanded functionality. The other part is because, like many of those dot-com busts, there are some big holes in DBX’s fundamental profile that should make investor question the company’s actual fit in a sub-industry that would seem to otherwise be poised to explode.
Fundamental and Value Profile
Dropbox Inc., is an online company that provides online file storage and sharing services. The Company provides a Dropbox collaboration platform, which enables users to create, access, organize, share, collaborate and secure the content. Its Dropbox paper allow users to co-author content, tag others, assign tasks with due dates, embed and comment on files, tables, checklists and code snippets in real-time. Its Dropbox Smart Sync enables users to access their content on their computers without taking up storage space on their local hard drives. Its Dropbox Showcase enables users to present their work to clients and business partners through a Webpage. DBX’s current market cap is about $5.1 billion.
Earnings and Sales Growth: Over the last twelve months, earnings and sales improved impressively; earnings increased 99.5% while sales increased by almost 22%. In the last quarter, earnings increased by 50% while revenues were more modest, increasing only 2.58%. Despite the impressive earnings numbers, DBX operates with a negative margin profile that casts doubt on how useful those earnings growth figures really are; Net Income versus Revenues over both the past year was -1.85%, and increase somewhat in the last quarter to -2%.
Free Cash Flow: DBX’s free cash flow is modest, at about $344 million and translates to a Free Cash Flow Yield of about 3.7%.
Debt to Equity: DBX has a debt/equity ratio of .78. Under most circumstances, this is a conservative number, but the story it doesn’t tell for DBX is the fact that at the end of 2018, the company had no long-term debt to speak of, but saw long-term jump to a little more than $441 million in the last quarter. DBX also current has $915 million in cash and liquid assets, which does imply the company can service their debt for now without any difficulty; but the fact the company is also operating at a loss means that all of their debt service is coming straight out of available cash – something that can’t continue on a long-term basis.
Dividend: DBX does not pay a dividend, which is normal for stocks in their industry.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for DBX is just $1.50, and which translates to a Price/Book ratio of 15.04 at the stock’s current price. This is a stock that hasn’t been trading publicly long enough to establish a useful valuation history for comparison, which means that the next most useful reference points come from industry averages. The industry average Price/Book ratio is 9.3, which is -38% below the stock’s current level and puts a “fair value” target at just about $14 per share.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The diagonal red line traces the stock’s downward trend from the stock’s peak in June of last year at about $43.50 to its bottom at the end of last year at around $18.50 per share. It also provides the range to calculate the Fibonacci retracement lines shown on the right side of the chart. Since March of this year, the stock has been hovering in a narrow consolidation range, with $24 providing current resistance and support sitting at around $21. The stock is somewhere in the middle of that range right now, and looks like it could be tightening that consolidation range. A break above $24 would likely signal a short-term reversal of the stock’s current trend, with room to run to about $28, where the 38.2% retracement line sits. If the stock break below $21, it should test the 52-week low at around $18.50 fairly quickly.
Near-term Keys: I frankly don’t see any way to justify DBX as any kind of a long-term, value-based bet. This is a company that needs to demonstrate a pattern of positive operations, including positive and growing Net Income, with strengthening Free Cash Flow and decreasing debt to see valuation metrics like Price/Book or Price/Cash Flow to improve enough to make them look appealing. Otherwise, the stock’s “fair value” price at around $14 just looks like much bigger downside than there is any potential for long-term upside. There could be short-term opportunities for an aggressive swing or momentum-based trade, with a break above $24 providing a signal to buy the stock or work with call options up to about the $28 level, and a break below $21 acting as a sign to short the stock or consider buying put options.