Dropbox’s (DBX) Cloud Pivot

by Dan June 13, 2019 2:09 pm • Trade Ideas

Shares of file storage company Dropbox (DBX) are trading up 4% today on news that the company is relaunching as a sort of “Cloud OS”, per TechCrunch:

Dropbox  is evolving from a file-storage system to an enterprise software portal, where you can coordinate work with your team. Today the company launches a new version of Dropbox that allows you to launch apps with shortcuts for G Suite and more, plus use built-in Slack message-sending and Zoom video calls. It lets you search across all your files on your device and inside your other enterprise tools, and communicate and comment on your team’s work. Dropbox is also becoming a task manager, with the ability to add notes and tag co-workers in to-do lists attached to files.

The new Dropbox launches today for all of its 13 million business users across 400,000 teams plus its consumer tiers. Users can opt-in here for early access and businesses can turn on early access in their admin panel. “The way we work is broken,” CEO Drew Houston said to cue up the company’s mission statement: “to design a more enlightened way of working.”

Technology prognosticator extraordinaire and author of the Statechery newsletter (which I highly recommend for only $100 a year), Ben Thompson had the following to say this morning about DBX’s pivot:

I find this tremendously exciting and sorely needed. For years I have been wondering which company will build the “operating system of the cloud”, and this seems like a very credible attempt to do just that. The new Dropbox app is basically a new version of the Finder or Explorer, with communication and collaboration built-in.

Thompson points to a Bloomberg interview yesterday with DBX CEO Drew Houston explains the pivot and what they hope to achieve from a product perspective:

It evolves the Dropbox experience from a folder full of files to a living team workspace where you can have not just files, but any kind of cloud content. So things like Google Docs, Sheets, and Slides, [Editor: also, Microsoft Office apps,] really anything that you’re using, and integrations with tools like Slack and Zoom, from within Dropbox you can send people messages, you can start meetings, you can send things out for signatures, you can see your calendar, it’s a much more integrated workspace. We saw so many of our customers, and frankly ourselves, struggling with the fact there are all of these new apps, and they are great, but how do you stitch them all together? We see a big opportunity to make that a much more seamless experience.

A lot of what we are doing is complementary: you’re not going to stop using Slack or stop using these other tools, in fact we’re making it easier for you to get them. We find that a lot of our customers love using these different tools but they need a more integrated experience and not having that means you’re always switching back and forth and there is a lot of friction.

Thompson suggests that the linked tools to “the new Dropbox isn’t simply complementary to a product like Slack in particular, it promises to make Slack a much better product in its own right”.

Despite being up 17% on the year, shares of DBX are 45% below its brief all-time high made a year ago, but remains up about 15% from its March 2018 IPO price of $21.

Wall Street analysts remain fairly positive on the stock with 12 Buy ratings, 3 holds and 1 Sell with an average 12-month price target of just below $31.

The stock trades about 57x expected 2019 adjusted eps of 41 cents which is expected to be flat year over year, while their GAAP eps decline in 2019 is expected to improve dramatically from their loss of $1.35 in 2018 to a loss of 20 cents this year, while sales are expected to grow 18% this year and 15% next with gross margins around 75%. The potential for GAAP profitability and stable and high gross margins are great, but the company’s revenue growth below 20% does not exactly place it in the category of white-hot cloud growth that has propelled so many of its newly public peers like Zoom (ZM) and Pager Duty (PD).

I look forward to reading more about how the company hopes for this new strategy to accelerate sales and profitability because any meaningful progress on being viewed as a Cloud Operating System, and their $10 billion market cap could attract a 30-40% m&a premium from the likes of an Amazon’s AWS unit, maybe an Oracle, Cisco, Salesforce, Adobe or IBM who are looking to beef up enterprise cloud offerings. Microsoft and Google seem far less likely given their existing strategies and offerings in the space.

Since breaking down below $25 for the first time in early October, the level has proven to be formidable technical resistance for the last nine months:


If I thought there was a potential for takeout at a price near $35 in the next six months, I might consider the following call spread risk reversal where i seel a downside put to finance the purchase of an upside call spread… for instance.

Bullish Trade Idea: DBX ($24) Buy Jan 20 / 28 -35 call spread risk reversal for 10 a cent credit

-Sell to open 1 Jan 20 put at $1.30

-Buy to open 1 Jan 28 call for $1.80

-Sell to open 1 Jan 35 call at 60 cents

Break-even on Jan expiration:

Profits of up to $7.10 between 28 and 35 (plus 10 cent credit), max profit above 35

Losses below 20, down 20% on Jan expiration, as if long 100 shares per 1 put contract sold short.

Mark to market prior to Jan expiration the position will show gains as the stock rallies towards long call strike or will show losses as it declines towards short put strike. The options market right now is suggesting about a 40% chance the Jan 28 calls are in the money on expiration, a 16% chance that the stock is at $35 and about a 23% chance the stock is $20.