Dropbox: Growing And Differentiating Its Business Despite Competition (NASDAQ:DBX)

Dropbox (NASDAQ:DBX) was not the first company to provide cloud storage and file hosting services, but it was certainly the most innovative. As a user, its magic of file syncing across devices attracted me to it multiple years ago, but as competing products emerged, initially I couldn’t be bothered to check what other products had to offer. I was of the understanding that soon enough other deep pocketed competitors will drive it out of the market, the company is living on borrowed time and I-will-cross-the-bridge-when-I-come to it. But as I was looking at its earnings reports, I was surprised to see that not only is the business surviving, it is growing! In my write-up, I will be delving into the following:

• User growth and a quick take on their financials
• Their competition and how they are differentiating themselves
• Factors that may be allowing them to grow in this cut throat environment
• Why I am not a buyer at this point in time

Growing and not just surviving

When I upgraded to Office 365 it came with 1 TB of Cloud storage. My old files are still in Dropbox, but I am syncing all my newer files in OneDrive. It got me thinking, with Microsoft 365 I get access to so many products plus the storage which is an additional benefit. Is everyone going through the same journey? All competing products offer a free tier, which is similar to Dropbox’s own offering. Even as a paid customer, competing products can bundle multiple products along with file storage. So what is the advantage that Dropbox still has? Surely, its growth must be cratering, and every quarter should be bad news after bad news. No! In fact, it’s quite the opposite.

Dropbox has more than 700 million users across 180 countries. Its number of paid users stand at 17.77M, a 6% increase from last year. All in all for fiscal 2022, it brought in $2.3B, a 7.7% growth with gross margins and profitability also up compared to last year (80.9% versus 79.4% and $553M versus $335M)

Dropbox CEO and Co-Founder on their earnings release:

2022 was a solid year for Dropbox amidst a challenging macroeconomic environment. We increased our profitability and free cash flow and continued to use M&A as an engine for growth, welcoming FormSwift to Dropbox. Looking ahead to 2023, we remain focused on executing against our strategic objectives, improving our operational efficiency, and continuing to leverage advancements in AI and ML into our product roadmap as we work towards our mission of designing a more enlightened way of working.

Dropbox is putting up these numbers despite the competition. Its competitors are OneDrive, Google Drive, Box, Amazon Drive (to be discontinued), Sync and iCloud. How are they able to compete with the giants? The one with the really deep pockets are OneDrive, Google Drive and iCloud, and they all could probably go toe to toe with Dropbox. So let’s dive into this business to understand what makes it tick with its customers.

Dropbox V OneDrive

From Dropbox’s own page, it admits that OneDrive is probably enough for users if it’s just about basic cloud storage and file sharing. But people prefer Dropbox when large teams are working on multiple file types that OneDrive is not able to support.

• Teams can work together on massive amounts of audio and video files (in the Terabyte range), preview sizable Adobe design files, and gather input from clients and vendors through frame-accurate commenting. This is even more applicable when different customers and vendors use different productivity suites (Ex: Google Workspace and OneDrive)
• It also has rich media integrations with multiple products (Adobe Premiere Rush, Simon Says etc.) and boasts of security features much more advanced than Microsoft. It counts its deep integration with Microsoft as an advantage which makes it as seamless as someone in the Microsoft family using OneDrive and Office 365 (Also, Dropbox works with files from both Microsoft and Google so well that it doesn’t count its lack of native office apps as a drawback)

Dropbox V Google Drive

If it’s about basic storage and file management, Google Drive probably works the best for users as its free storage options not only come with its own suite of apps but storage space is also much more than Dropbox (15 GB versus 2 GB). But it edges out Google as the use case becomes deeper.

• Dropbox uses a stronger version of encryption to keep files safe when they’re being stored – Advanced Encryption Standard 256-bit encryption.
• When sharing files, passwords can be set on shared files in Dropbox so that only people who have that password can access them and also have the ability to set an expiration date for sharing, after which the shared link will stop working
• Google downloads and uploads the entire document while syncing, which result in delays when accessing the latest version from another device, whereas Dropbox syncs changes to a file in blocks. Therefore, if you utilize the collaboration features in Dropbox, changes are reflected more quickly to all users, resulting in faster processing time. Additionally, accessing the most recent version of your file on a different device requires less waiting time

Dropbox V iCloud

Since Dropbox focuses heavily on business and team collaboration, it again beats Apple outside of basic features for personal and family use.

• Integrates well with Microsoft Office 365 providing you with the best of everything.
• Offers strong versioning capabilities and a reliable web-based preview feature that enables users to comment on specific sections of a previewed file. This is a great feature for quick collaborations that don’t require users to open lengthy documents or compatible file formats, making it an ideal solution for team members working on projects.
• Dropbox is also better at sharing files than iCloud, with support to other third party services (Slack, Trello). It also has the ability to password protect the shared files and set an expiry date for shared links (same as the advantage it had over Google). Currently, iCloud is not able to match the range of advanced file-sharing features against Dropbox, which include bandwidth controls for file synchronization.
• Dropbox also boasts of a Block-level file syncing, similar to the advantage it has over Google.

Why I am rating it as a hold?

1. Its growth is good, but not good enough for me to think that this is the best I can do for my money.
2. Its shareholders’ equity is negative and in the last two years it looks like it took about $2B in long term debt to fund its growth. Unless it’s a very asymmetric opportunity, I stay away from companies that have a lot of debt in their balance sheet. As of now, all indicators point towards the fact that the company borrowed heavily to grow their business
3. When I consider its GAAP metrics, its Price to Earnings (25) seems decent in relation to the sector medians, but its earnings are not growing fast enough that would make it a buy. Also, it’s currently trading at 4 times Price to Sales and would likely remain in this range considering its revenue growth in the single digits. Its Price to Cash flow seems good, but this metric is quite distorted due to its stock based compensation making up almost 40% of its OCF
4. I admire the fact that they have been able to survive and grow in spite of the competition from the big players, but the points I highlighted above does not make it seem like it’s the best investment for me, and therefore I will not be buying into this business.