Everyone’s talking about it so there’s no use ignoring it. With the coronavirus from China raging across the world, the markets have reeled under the pressure. Among those hardest hit are technology growth firms like Dropbox (NASDAQ:DBX). A file-hosting service turned modern digital workspace provider, DBX theoretically has an upside pathway due to its core business. Clearly, though, this didn’t help Dropbox stock.
Nevertheless, I’m certain that contrarians are eyeballing shares. For one thing, aside from the coronavirus-related volatility, Dropbox stock has enjoyed an explosive start to the new year. That was especially the case immediately following the underlying company’s fourth quarter of 2019 earnings report. A comprehensive beat in addition to a very positive outlook for the next few years bounced up DBX by 20%.
Specifically, against an earnings-per-share target of 14 cents and a revenue estimate of $443 million, management delivered earnings of 16 cents per share on sales of $446 million. Further, the company announced that they expect to be profitable by the end of this year. And Dropbox finance chief Ajay Vashee anticipates generating $1 billion in free cash flow by 2024.
This was a “firing on all cylinders” moment, convincing Wall Street to give Dropbox stock a fair shake. Since the early summer of 2018, DBX frustrated investors with a steady erosion of market performance. However, Q4 changed the narrative.
Even with the coronavirus, bulls likely justify their optimism because of Dropbox’s primary service. As a digital workplace platform, the company essentially encourages telecommuting. With the Centers for Disease Control and Prevention warning that an outbreak here is inevitable, more companies will seek telecommuting as a necessary mitigating solution.
Still, don’t jump aboard yet.
Coronavirus Is a Wildcard for Dropbox Stock
If we didn’t have the coronavirus barreling down our necks, I’d be interested in DBX for both the near and long term. In my view, I liken Dropbox to Adobe (NASDAQ:ADBE). Both provide capabilities that allow individual workers to untether themselves from the physical workspace. Although the two organizations are obviously different, they each place the emphasis on the work product, not on where it gets done.
Plus, as the gig economy becomes more prevalent in our society, I anticipate higher demand for Dropbox’s modular platform. The beauty here is that it is as simple or as complicated as you want it to be. Frankly, many people and organizations don’t need a full-blown cloud architecture from the likes of Amazon (NASDAQ:AMZN) or Microsoft (NASDAQ:MSFT). DBX fills a gig economy niche, bolstering the case for Dropbox stock.
Unfortunately, the coronavirus presents multiple headwinds. First, Dropbox stock is a growth name and therefore depends on strong risk-on sentiment. However, this is the type of sentiment that is declining by the hour due to the epidemic. If this crisis worsens – and all indications suggest this is the case – investors will likely roll their funds into risk-off or safe-haven assets.
Second, Dropbox has substantial exposure to the international markets. In a normal bull market, that’s a cause for celebration. However, the coronavirus is spreading everywhere. Additionally, the U.S. issued a travel advisory against South Korea, suggesting economic troubles looming for Asia. Also to note, there are 470 coronavirus cases in Italy.
Third, as I mentioned above, an outbreak will likely occur in the U.S. In fact, early signs suggest that we’re on the cusp of a serious situation. Simply put, these factors don’t support investments like Dropbox stock.
Keep the Powder Keg Dry
I’m not writing these words to promote a sensationalist narrative. Rather, I’m considering the asymptomatic transmission of the coronavirus and putting two and two together. In other words, this is a moment to hope for the best but plan for the worst.
Therefore, I just want to be smart with my money. If you were bullish on Dropbox stock prior to the outbreak, there’s no reason to change your strategic perspective. Tactically, though, I wouldn’t dive in. I highly doubt that Wall Street is fully pricing in the outbreak’s catastrophic potential.
Remember, it’s not just about how many people get infected and killed. Instead, it’s the resources that are shifted from accretive endeavors to consumptive, damage-mitigating ones. Put another way, the money that we spend fighting the coronavirus won’t return us anything down the line. Keep that in mind when considering DBX or any other risk-on stock.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.