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Analysts have found plenty of reasons to praise the Switzerland of file storage.
In initiating coverage of Dropbox Inc. Tuesday, J.P. Morgan analyst Mark Murphy said that Dropbox’s neutral platform gives it a key advantage over its tech-giant competitors. Sure, Dropbox goes up against titans like Microsoft Corp. and Alphabet Inc.’s Google, for whom file storage is just a small part of the business (and one that they can afford to run at a loss forever). But Dropbox plays nicely with all of the major players, which gives it an edge.
“Platform neutrality has been cited by customers as a key reason for selecting Dropbox, whereas Microsoft and Google are perceived to play to their own ecosystem of applications through integration and bundling,” wrote Murphy, who started coverage of the stock with an overweight rating and $32 price target. Dropbox also integrates with Adobe Systems Inc. Autodesk Inc. Slack, and others.
Roku Inc. played up its own neutral positioning during its IPO process last year, which proved a successful strategy. That company competes against Apple Inc. Amazon.com Inc. and Google in the market for streaming-media players, but managed to convince investors that being small was a benefit because Roku wouldn’t get caught in the crossfire of a larger battle between tech giants.
At least eight analysts recently began coverage of Dropbox with the equivalent of a buy rating, according to FactSet. Four others initiated coverage with hold ratings, and one deemed Dropbox a sell.
Bullish analysts generally pointed to the big opportunities ahead. Among them, according to Piper Jaffray’s Alex Zukin, is the idea that Dropbox could “fundamentally change business processes” by quickly enabling organizations to sift through all their knowledge and gain insights on how work is done. Zukin has an overweight rating on the stock and a $40 price target, the highest among analysts listed on FactSet.
Canaccord Genuity’s Richard Davis wrote Tuesday that cloud storage represents a $30 billion annual market opportunity and that Dropbox has managed to develop a “leading model” while maintaining attractive financials.
“Perhaps even more impressive than top-line momentum is the fact that Dropbox is building its business with free-cash-flow margins north of 20%. Today the firm has gross margins better than 70%, spends less on sales & marketing than it does on development, and maintains >100% net dollar retention on business customers, which combined characterize a model built for profitable scale,” Davis wrote. He predicts that Dropbox could grow its free-cash-flow margins to north of 30% over time.
Davis has a buy rating on the stock and a $35 target.
Other analysts outlined reasons for concern. Instinet’s Christopher Eberle, who initiated coverage last week with a “reduce” rating and $21 target, said that the company’s inability to convert free users to paid ones is troubling.
“Dropbox has grown its user base by close to 100 million over the last two years, and in that time frame paying subs have increased from 6.5 million to just 11 million,” he wrote. “We believe that the average user quickly exceeds the 2GB of free storage, which gives us great concern about the rate at which Dropbox has been converting its free subscriber base. Customer acquisition cost (CAC) is extremely high when assuming the costs of maintaining a Basic (free) user for months or years to conversion (if ever).”
Both RBC Capital Markets analyst Mark Mahaney and Jefferies analyst John DiFucci like Dropbox’s business, but said the stock looks fully valued following a run-up of about 40% in the weeks since the IPO.
Dropbox shares were up 1.4% in Tuesday trading, while the S&P 500 was up 0.9%.