Why the heck is Dropbox Inc (NASDAQ:DBX) soaring so much? DBX stock is up 40% in five trading days and while that type of rally isn’t incomprehensible when there’s a catalyst, there’s seemingly no catalyst here.
Trade-war worries hurts stocks, right? Right, so the selloff in equities makes sense. Chinese stocks are all the rage, so it makes sense why Sogou Inc (NYSE:SOGO), iQiyi, Inc (NASDAQ:IQ) and HUYA Inc – ADR (NYSE:HUYA) are going through the roof. Roku Inc (NASDAQ:ROKU) made a similar rally on strong earnings.
But those are all reasons for a rally or a fall. But for Dropbox? There’s nothing.
Dropbox didn’t report earnings, didn’t sign a game-changing deal or receive a big investment or endorsement from a notable investor. At least not publicly or recently.
What Could Cause a Ramp in DBX Stock?
The first thought when a stock rallies like this is generally M&A. Could DBX stock be an acquisition target? This young into its public life, you’d think whoever is buying would have tried to get the deal done before going public. Conversely though, perhaps Dropbox management knew the IPO market was hot and figured they could drive their valuation higher (with DBX stock now up 100% from its IPO price) and then go out via M&A.
There are no obvious options trades that showed such a move would occur. But a prior partnership may have.
Salesforce.com, inc. (NASDAQ:CRM) and Dropbox announced a strategic partnership right before the latter went public. Salesforce owns nearly 5 million shares of Dropbox, not a small amount considering the outstanding share count of just 73.8 million. Could it be adding to its position? Could Salesforce be gearing up to outright acquire Dropbox?
That would be the most obvious, although we’ve seen CRM and Microsoft Corporation (NASDAQ:MSFT) butt heads in the M&A arena before. Worth mentioning is that MSFT has also integrated Dropbox products with its services. Both companies wanted LinkedIn a few years ago, with Microsoft ultimately winning that deal at more than $26 billion. So maybe one or both of these companies wants Dropbox now.
Maybe it’s just a case of CRM increasing its position in the stock, since it already owned a stake anyway. Perhaps Dropbox has roped in a massive new customer or signed a new big deal that isn’t yet public to the rest of us. The company reports earnings in August, so it could be a while before we find out about any of this.
Of course, this is all just speculation too. Maybe the market simply snapped, bidding DBX stock higher on a massive breakout. The only thing we know for sure, is that we don’t really know why it’s going higher, only that it is.
Trading DBX Stock
If I were an investor buying on the IPO, DBX stock would be one of my favorite of all time. The company priced its IPO at $21 and opened near $29 in late-March. It has traded in a tight range since, bouncing between $28.50 and $32 for almost three months. Now it’s exploding higher.
M&A would simply be icing on the cake.
Click to Enlarge
On the chart above, we can see how DBX stock was coiling into a tighter and tighter range over time. As it neared resistance, traders were on the lookout for a breakout in Dropbox. But a run from $31.50 to $43 in three trading sessions isn’t the type of move we had in mind. Also notice how much volume DBX stock has been trading the past few days — way more than its average.
So what now? From a discipline perspective, I can’t pile into DBX stock after this type of run without knowing why it’s up so much. A lot can change that, though. Finding out what drove its stock higher would be the most helpful piece to the puzzle, but traders don’t even need that. Now we just need some direction to show itself. Let’s see if DBX stock can consolidate from here.
Maybe it goes to $50 first. Maybe it’s back down to $38. I don’t really know and with the exception of whoever is bidding it higher, the rest of the market doesn’t know either. And don’t kick yourself if you missed it. DBX stock isn’t a once-in-a-lifetime rally. There will other similar opportunity in the future.
For now, let’s wait for some clarity.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell held a long position in CRM.
