As they’ve done on every earnings report as a public company, last night Dropbox (NASDAQ:DBX) beat on both the top and bottom lines. They also impressed on many other key performance metrics, so the stock spiked 6% on the headline. This morning, the greens are holding up in spite of the geopolitical fears from the China tariff war.
As of midnight on Thursday, the U.S. increased the tariffs on China imports. So now China is likely to retaliate and consequently the equity markets are having a bad week. So seeing upside in DBX stock here this morning in the face of this further solidifies its conviction.
DBX delivered 22% revenue growth year-over-year which is stronger than expected. They also beat the average revenue per user number, so they are building a base of clients that they can monetize going forward. This can be up-sells to higher tiered plans or even a switch to business accounts. Moreover, they reported having 13.2 millions paid users which was 200,000 better than forecast.
Investors have been neutral on DBX so far. By that I mean that it came into its earnings report up 14% year to date which is in line with the S&P 500. Longer term, the price action is negative. Dropbox stock is down 26% in a year and 18% since its initial public offering. Box (NYSE:BOX) which is probably its closest comparison stock is only down 4% for the same period.
Looking Ahead in DBX Stock
Nevertheless, this earnings report shows that management is executing on plans reasonably well, so they left no specific reason to sell the stock on this headline. But I still worry about their competition as it is fierce and some with deep pockets since this includes Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL). Although they are not identical business models, they do cross paths, especially with Google.
In spite of my trepidation, I can trade Dropbox stock from the long side, but I have to be diligent with my exit points. I don’t want to stay long it past $27, as it will face selling pressure at the slightest hint of trouble from its own execution or from market-wide threats like this geopolitical headline week. The bears will try a repeat performance once we get there.
The demand for DBX services will continue to be strong. Thanks to the intrepid Salesforce.com (NYSE:CRM), which blazed the trail to the cloud, the world has been migrating everything to the cyber-sphere. Odds are that in spite of the competition, there will be enough business to go around. There are only a handful of companies right now, so they should all thrive from this trend.
Valuation is a wrinkle in the current fundamentals. Since it still loses money, I use revenue ratios for comparisons. DBX sells at a 7.1 price to sales which is about 40% more than GOOGL or BOX. But for now, this is not a deal killer for me since value is not what I seek in a growth stock. So as long as management keeps delivering reports like today’s, investors can give them slack on profitability.
Wall Street experts agree, as most analyst who cover the stock still have it as a buy while the stock is trade way below the lowest of their price target. Their average price target for DBX is $32 per share, so according to them, it still has a long runway ahead of it.
In summary, even though I will never pay for Dropbox services, I think the stock will continue to perform in a rising stock market. So if long DBX stock, I stay in it while keeping trailing stops below to protect my investment.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.