Analysts Still Like Dropbox After Showing No Signs Of Deceleration

Online smart workspace company Dropbox Inc DBX reported strong third quarter results while GAAP losses worsened year-over-year and likely contributed to the stock's weakness. Several analysts continue to favor the stock.

DA Davidson: No Deceleration

Dropbox's report marks the first time in at least 11 quarters where revenue growth didn't decelerate, DA Davidson analyst Rishi Jaluria said. Revenue growth of 20% was consistent with the second quarter and management guided to a similar 20% growth in the coming quarter at the high end.

The ongoing trend of decelerating revenue growth was a source of concern for investors but the near-term stability "can help assuage investor fears of commoditization," the analyst wrote in a note.

The company is seeing signs of early success in the "new Dropbox" and could re-accelerate growth although the financial impact won't be seen until the back half of 2020.

On the other hand, the company is seeing fewer users than expected who opt for annual plans despite a discount. This could prove to be a headwind for billings and cash flow although this could be an SaaS wide trend and not specific to Dropbox.

Jaluria maintains a Buy rating on Dropbox's stock with a $30 price target.

Attractive Valuation

Dropbox's report confirms the stickiness of its products as churn came in lower-than-expected and subscriber count rose 400,000 despite a price increase, Bank of America analyst Justin Post said. The "new Dropbox" could positively impact the company in four ways, including even lower churn rates, increasing upgrades to premium packages and attracting new paying subscribers.

The multiple potential catalysts suggest the stock is "attractive" at just 4.2 times 2020 P/S and 24 times P/FCF (adjusted for capital leases and Hellosign earn backs) versus the SaaS group at 8.5 times and 45 times, respectively. Post maintains a Buy rating, with the price target lowered from $32 to $33.

Olivetree strategist Dan Forman said Dropbox's report is "good enough" as users and average revenue per user (ARPU) expanded. New products were cited by management as driving further ARPU and price increases with lower churn, which "sounds bullish" but partly offset by noting paid user growth could slow down.

Price Action

Shares of Dropbox traded lower by 5% to $19.92 at time of publication.

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