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Avoid Dropbox Inc. As It Reports Earnings for the First Time

Competitive threats could make Dropbox stock the next AOL of the cloud industry

Dropbox Inc. (NASDAQ:DBX) will report earnings for the first time as a public company. This announcement, which will come Thursday after the bell, will likely serve as a trendsetter for the company. Hence, it needs an earnings beat. Reporting a higher earnings number should add value to the company for a time. However, its lack of a moat and the threat of much larger competitors leave few opportunities for investors in Dropbox stock to profit.

Analysts expect Dropbox earnings of 4 cents per share on revenues of $309.26 million. The earnings announcement will come Thursday after the market closes. This will serve as the company’s first earnings report since launching its IPO on March 23. With no earnings history, predicting whether the company will beat earnings becomes more difficult. Still, I think given the position of Dropbox stock, it needs to beat estimates here for many reasons.

Valuations for Dropbox Stock Remain High

First, the price and valuation of Dropbox stock limits its potential growth. The company set an IPO price of $21 per share. Dropbox stock surged by 35% on its first day of trading. It closed at $28.48 per share that day. However, almost two months after that initial surge, the stock trades at just over $30 per share.

The stock looks to have grown far ahead of valuations. The forward price-to-earnings (PE) ratio stands at about 166. Analysts project 19 cents per share in net income for this year and 30 cents per share for 2019. That calculates to a 58% growth rate. However, even if it sustains that level of growth, that takes the price-to-earnings-to-growth (PEG) ratio to almost 2.9. The average PEG ratio for the S&P 500 stands at about 1.33.

Dropbox Faces Big Competition

Second, DBX faces formidable competition. The cloud storage industry currently enjoys rapid growth. It also sees many companies competing for business in storage. While it attracts small players such as Box Inc (NYSE:BOX), it also draws the likes of Microsoft Corporation (NASDAQ:MSFT), Amazon.com, Inc. (NASDAQ:AMZN), and Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG). The high growth in this industry leaves room for all of these players — for now. But what happens when growth slows? Will an $11.8 billion company such as Dropbox compete with three tech behemoths who are each within striking distance of a $1 trillion market cap?

For now, Dropbox and Alphabet’s Google Drive hold the largest market shares in the business. Dropbox credits much of its advantage to its first-mover status in the industry. In fact, Dropbox dominated this business until Google Drive and other services began chipping away at its market share. Dropbox also wins praise for the platform’s ability to sync files better than Google Drive or Microsoft’s One Drive.

Dropbox Stock Has Become the Next AOL

Third, because of competition, the time to build up its valuation remains limited. The competitive position of DBX indicates it has become the AOL of the cloud storage business. AOL today exists as an obscure subsidiary of Verizon Communications Inc. (NYSE:VZ). At one time AOL was a no-moat internet service provider (ISP) that grew by becoming the first major ISP and gaining name recognition. However, over time, AOL lost customers as its dependence on dial-up technology left the company with no competitive alternatives to large telcos that offered faster service.

Like AOL, I think Dropbox will eventually become a subsidiary of a much larger player — if it exists at all. Perhaps a company will overpay for DBX much like Time Warner Inc (NYSE:TWX) paid too high of a premium in its failed union with AOL. Investors cannot count on such a scenario playing out. What they can count on is Dropbox’s lack of a moat limiting the company’s options over the long run.

Concluding Thoughts on Dropbox Stock

The no-moat status of Dropbox stock makes an earnings beat critical in its first earnings report. Wall Street predicts DBX will report earnings of 4 cents per share. An earnings beat here should set the trend and may give DBX stock a lift for a time.

However, the much bigger question that remains is how long it will offer cloud users enough incentive to choose them over Google Drive, One Drive, or the other multiple choices users of cloud services enjoy. It appears that like AOL in the 1990s, the size advantage will overtake Dropbox in the long run.

For this reason, I would recommend investors look elsewhere for profits in the cloud, no matter what earnings look like for Dropbox stock.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.


Article printed from InvestorPlace Media, https://investorplace.com/2018/05/avoid-dropbox-inc-dbx-stock-reports-earnings-first-time/.

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