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.
But private equity firms typically like enterprise firms with double-digit growth, at least 20%, and even though more than $2 billion in revenue could be enticing, it seems to be slower growth than most PE firms typically like these days.
Old-school PE firms, the type that bought companies that might be in trouble but with a lot of revenue, could consider the deal, working to contain operating costs, squeeze revenue and extract as much value from the company as possible. Whatever was left of Dropbox could be later re-floated or sold. This sort of deal used to be more common.
Is Dropbox growing too slowly for such a deal? Likely not, though its slower growth would put a ceiling on the value of such a deal. Growth is variable. And Dropbox under PE ownership could get nasty with pricing changes and the like — if a PE company thinks that Dropbox customers are sufficiently sticky as to endure pricing changes, well, there’s blood in that muscle.
Or perhaps one of the usual suspects might have a look at Dropbox? We’re thinking Salesforce, Microsoft or maybe Amazon or Adobe. These companies would welcome the revenue that Dropbox has today, along with nice components that the company sports, like HelloSign for electronic signatures and DocSend for secure document sharing.
Even with its market cap well under $10 billion, it would take some serious dough to make this deal happen. But Microsoft just spent over $60 billion for Activision Blizzard, and it wasn’t that long ago that Salesforce spent almost $28 billion for Slack, so we’ve definitely seen the biggest enterprise companies throwing their cash around when they think it’s worth their while.
Still, it’s worth pointing out that CEO and co-founder Drew Houston owns more than 20% of Dropbox, making him the largest individual shareholder, according to Forbes, leaving him quite a bit of leverage against unwanted advances, especially if some percentage of these are Class B shares with 10:1 voting rights.
Beyond Houston, Vanguard (which has a huge number of retirement and individual investment accounts under its auspices), is the company’s largest institutional investor with over 10% ownership.
What have we got here?
While Box and Dropbox are not a perfect comparison, Box has come back from single-digit growth — and did it with activist investors hanging around for a kill that never came. In spite of the revenue growth issues, let’s not forget that Dropbox is still a substantial company.
The company reports over 700 million registered users, with almost 17 million of those paying for the service and 80% of users using the product for work content. When you add in HelloSign and DocSend, you have a nice set of business services to work with.
The company has always been competing with giants like Google, Microsoft, and to some extent Box and Egnyte. Perhaps most damning is slowing growth at a time when companies are turning to digital solutions like Dropbox more than ever, as the pandemic accelerated companies’ move to the cloud. Yet even with all that, there is reason to believe that Dropbox has a comeback in it.
If Dropbox beats the numbers when it reports this week, our concerns could be ameliorated. If it doesn’t, it will be interesting to see how shareholders react and whether some firms step up and make an offer for the storage company that would be difficult to refuse.
While Houston has some protection due to his stake in Dropbox, he still has a fiduciary duty to the other shareholders. As we learned with the Twitter deal, there can be protections in place, but in the end, if the offer is good enough, the board will acquiesce.
But all of this speculation pivots on the earnings performance — and then we’ll see what will be.