As Dropbox heads into earnings, it desperately needs a win

Consumer and business file storage and sharing service Dropbox will report its first-quarter earnings tomorrow, and for the former unicorn and present-day public company, the stakes appear quite high.

Dropbox is coming off a year of growth stuck in the low teens, with growth forecasted to prove even slower growth in 2022.

The performance Dropbox reports Thursday could bolster the company’s growth narrative, boost its guidance for the year, encourage its share price and assuage investors. Alternatively, the opposite is possible; if Dropbox reports earnings that disappoint the investing community, the company could see its share price fall further.

The company has a 52-week high of $33 per share. The stock was down over 2% this morning at $21.30, but up from the 52-week low of $19.90. Dropbox has a market cap of just over $8 billion.

That kind of performance, with falling valuation, decelerating growth and a stagnant share price, is bait for takeover deals, meaning that Dropbox’s ability to rip cash out of its operating business could help make it an enticing target for a hostile acquisition.

The idea is not mere theorizing; erstwhile Dropbox competitor Box recently tangled with investors about its leadership, and Zendesk’s performance put it at odds with external investors, forcing the customer support company to fend off a takeover offer.

With tech valuations far from recent historical highs, Dropbox could find itself in the crosshairs of private equity firms, and a poor earnings report could kick off unwelcome deal-making. Let’s talk about the company’s recent and expected results, how vulnerable it may be, and, finally, who might want to buy it (if it comes to that).

Looking for sustainable growth

In the fourth quarter of 2021, Dropbox reported revenues of $565.5 million, up 12.2% from the year-ago period. For the full year, Dropbox did even better, posting 12.7% growth as it reached some $2.158 billion in revenue for the year.

Fast growth? No. Solid? Sure. But when Dropbox looked ahead in its guidance during its final earnings call concerning 2021, the company’s expectations for this year were less encouraging. For 2022, Dropbox anticipates $2.32 billion to $2.33 billion in total revenue, figures that work out to growth of 7.51% to 7.97%, which, to be blunt, is not great.

Single-digit growth is not a place that any public company wants to hang around in — unless it has a fat dividend and is content to keep costs low. Dropbox is not such a company.

It is worth noting that Dropbox’s Q1 guidance of $557 million to $560 million worth of revenue brackets current analyst expectations, according to Yahoo Finance data. At the same time, we wonder whether investors would be enthused if Dropbox posted in-line revenue of $558.95 million.

What would a narrative-changing result be for Dropbox? In our view, to shake the malaise, a beat on revenue in Q1 and at least some modicum of guidance expansion for the year. Else, we could be looking to start a countdown clock.

Could buyers begin circling?

There are a few places where Dropbox could find a new home. The most obvious is private equity — selling the company to a financial entity. Such deals tend to target slower-growing, cash-generating entities that could support a heavy debt load and perhaps have a shot at lower costs or even accelerated growth.