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Wall Street wants a blowout to welcome Dropbox Inc. to the earnings party.
Set to reveal its first-quarter results Thursday after the bell—its first as a public company—investors are looking for Dropbox to cement its well-received initial public offering with results that will handily beat sell-side analyst estimates. The cloud-storage company raised nearly a billion dollars in its IPO last month, pricing above an elevated range, and shares have gained since.
“It’s supposed to be IPO 101: You make sure you have your first quarter in the bag before you go public,” said Barrett Daniels, Chief Executive of Nextstep Advisory, an IPO consulting company. “You’re supposed to kill your first quarter, and missing your first quarter is the worst thing in the world. You just can’t do it.”
Because most companies execute an IPO while they are midway through a quarter, executives should have a clear picture about their finances by quarter’s end, or at least enough of an idea to know whether they can exceed expectations.
Don’t miss: 5 things to know about the Dropbox IPO
Daniels says that there is pressure on freshly public companies to exceed Wall Street’s expectations for a few reasons. Chief among the is the opportunity to take advantage of the public’s interest and investor interest because there is a limited appetite for new, emerging companies and Dropbox is no exception.
“Eventually that enthusiasm dies—it doesn’t hold up.”
Spotify Technology SA , for example, failed to give investors the blowout they were looking for in its first results it released as a public company on May 3. The results didn’t miss expectations, only meeting what Wall Street had modeled and the company’s own guidance, and investors have sent the stock down roughly 8%.
“Spotify didn’t have a bad quarter, they just met expectations” Daniels said. “Truthfully, it’s kind of a disappointment.”
Snap Inc. missed expectations altogether for its first public quarter and has delivered decidedly mixed results in the quarters since, including its December-quarter report last week. Investors have sent the stock down well below its IPO price.
Here is what to expect
Earnings: On average, analysts polled by FactSet model first-quarter adjusted earnings of 4 cents a share and GAAP losses of $2.16 a share. Contributors to Estimize, which crowdsources estimates from analysts, fund managers and academics, predict earnings of 4 cents a share. GAAP earnings are typically weighed by vesting stock in the first quarter a company reports its results after an IPO, such as when Snap lost $2.2 billion in its first quarter as a public company.
Revenue: For Dropbox’s first quarter, analysts model Dropbox sales of $309.2 million. Estimize contributors expect revenue of $308.9 million. Dropbox reported $305 million in free cash flow for 2017, something of a rarity for companies so close to their IPO.
Stock movement: Dropbox began trading March 23 and offered shares at $21, above the high end of its updated pricing range of $18 to $20 a share. It initially sought to price shares in the $16 to $18 range. Since listing, Dropbox stock has gained 4.1%, as the benchmark S&P 500 index has increased 2.9%.
Of the 13 sell-side analysts that cover Dropbox, eight rate the company a buy, four have a hold on the name and one gives it a sell rating, according to FactSet. The average price target is $33.15, which reflects 9% upside from Monday’s close.
What to look for
As with many technology companies, a key data point to watch is average revenue per user. RBC Capital Markets analyst Mark Mahaney wrote in a note to clients last week that his team expects Dropbox ARPU to grow 2% to $113.20, compared with the year-earlier quarter. Overall, Mahaney wrote that he expects the company to add 140,000 new users, which would bring its total paying user count to 11.12 million.
Mahaney rates the company the equivalent of a hold with a $33 price target.
Nomura Instinet analyst Christopher Eberle wrote in a note to clients last week that the G Suite office productivity software owned by Alphabet Inc.’s Google is a good comparison to Dropbox’s growth aspirations. Both G Suite and Dropbox have free components which have amassed a large user base that the company hopes to use to make inroads into the enterprise space.
Eberle rates Dropbox the equivalent of a sell with a $21 price target.
Rival Box Inc. Chief Executive Aaron Levie has told MarketWatch in the past that he sees Dropbox as the Netflix Inc. of cloud storage, and Box as the Salesforce Inc. of the sector. Levie pointed to the company’s strong cash flow and high user retention rates as strengths. Box plans to report fiscal first-quarter earnings on May 30.