At a valuation of $11.5 billion by market cap, Dropbox Inc. (NASDAQ:DBX) looks like it could get bigger as its business continues to show strong momentum. The stock is holding its gains since its IPO when it rose 40%.
By comparison, Box Inc (NYSE:BOX) fell 5% that day. On Apr. 17, glowing analyst coverage on the stock started, giving more reasons for the stock to go up. Are the analysts overly optimistic? Will the stock continue climbing higher?
User Growth
Investors are enamored over Dropbox’s incredible rate of user growth. This echoes that of the days of user activity and growth driving shares of Twitter Inc (NYSE:TWTR) or Snap Inc (NYSE:SNAP) higher.
As a growth company, profits and revenue come second in importance for investors. The big assumption is that the company converts a portion of its users to paying customers. Twitter and Snap also rely on growing user activity to attract its advertisers, whereas Dropbox takes a different approach.
Dropbox has 500 million users. It added 100 million users in 2017. The app is simple for home users. Once installed, the Dropbox storing app gives access to their files on any device. Every time a user invites friends to install and use the app, the company rewards the user with more storage.
Dropbox’s business model relies on a portion of these users convincing their bosses or IT department at work to sign up for the paid service. The big “if” for eventual revenue growth is if the company will convert its free-riding user base to business accounts through word of mouth.
Businesses have many online storage options. Microsoft Corporation (NASDAQ:MSFT) offers OneDrive, which it advertises as letting users “Save your files and photos to OneDrive and get them from any device, anywhere.” Google Drive from Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) offers “a safe place for all your files.”
With many online storage options, Dropbox appears to face enormous competitive pressures, but the company has an edge. As a pure play in the online storage space, the company may spend its advertising and support efforts to convert consumer accounts to paid business ones.
Analysts Bullish on DBX Stock
Citing analyst bullishness on DBX stock is hardly a compelling reason to believe there is more upside in the stock. Still, the analysts make a few good points. JPMorgan’s Mark Murphy thinks Dropbox will work alongside the major players in the cloud storage services space.
This argument makes sense because an Office 365 subscriber may not necessarily want to use Microsoft’s OneDrive. Similarly, a corporate user on Google may prefer to keep the Google Drive app on Android phones only.
Dropbox’s flexible app works well and easily on any platform, be it the desktop, Android or iPhone. As another example, users may want to share files on Dropbox without sharing Google or Microsoft accounts.
JPMorgan set a $32 price target on DBX stock. Canaccord Genuity set a $35 target, while Piper Jaffray is most bullish with a $40 price target. Per Tipranks, the average price target on Dropbox stock is around $34, from the 12 analysts covering the stock.
Takeaway on DBX Stock
Since DBX stock is still newly listed, investors should watch for the lockup expiry post-IPO. Insider selling could add negative selling pressure. The company also makes no money. At least, not yet. Should markets sell off and volatility rise, Dropbox stock could get caught up in the bearishness.
Longer term, the company’s prospects are still very good because it is still in a growth phase. With no signs of the company facing a decline in sign-ups, the stock could outperform the technology index. This is especially true if investors decide to start a position in this young company.
Disclosure: Author does not own shares in any of the companies mentioned.
