For as long as I can remember, I’ve been bearish the Dropbox thesis in general. This wasn’t because the company was doing a bad job, but more because of the concept. My apprehension stemmed from the the competition that it faced. Mega-capitalization companies like Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) and Microsoft (NASDAQ:MSFT) are just two of its fierce foes. But the pandemic may have changed my bearish premise for Dropbox stock.
The lockdown turbocharged the migration online. Demand for anything cloud related soared so much so that there is more room for it to grow. The DBX long-term thesis got more bullish under the new work-from-home normal. In short, there is enough room for all providers of such services to thrive.
What makes this opportunity even better is the fact that the stock has already corrected from its recent highs. The bulls have given up almost 23% from May, and they are falling into support zones.
The knee-jerk reaction from the pandemic panic caused a very deep March bottom. The current price is almost exactly in between that and the recent highs. This is a true representation of “somewhere in the middle lies the truth,” so I expect support below.
If this malaise on Wall Street persists, there should be even better opportunities to add Dropbox stock.
Long-term, this management team will carve a nice niche for themselves in this ever-growing online space. Using the cloud is no longer an option — the virus made it a necessity. The trend will continue for a long while, and demand on Dropbox products and services should remain strong. It’s up to management — it’s their game to lose, as they say in sports terminology.
Dropbox Stock Has Upside for Patient Investors
This doesn’t mean immediate profits, but the idea is to buy low and sell high. The thesis today is that it has seen its lows for a while. The test from the quarantine was a serious one.
Investors on Wall Street were nervous on Monday and Tuesday from a combination of headlines but in reality nothing has changed. These are resilient markets. They recovered from the Covid-19 crash and set new highs against all odds. The VIX remains too high yet the buying of stocks persists. The bears will need a Black Swan event to break the opportunity in Dropbox — and equities in general.
Investors who are patient should do well owning DBX near $18 per share. With these current fundamental metrics, it may seem expensive. Its trailing price-earnings ratio is 244 — triple that of Amazon (NASDAQ:AMZN). But the more important metric is that Dropbox stock price is only 4.8 times full-year sales.
For a growth stock, this is not a lot of froth to shed.
In other words, it should have better days ahead since the investors are realistic about the upside potential. This is not the case with Zoom (NASDAQ:ZM), which has nearly 100 years worth of sales built into its current stock price. Sure, Zoom is growing a lot faster — but right now we’re making the case for Dropbox not against Zoom.
The Road to Riches Won’t Be Easy, So Get Creative
Just as there is support below current price, there is definite resistance into $24 per share. But therein lies the opportunity. If the bulls can overtake that with force, they can then rally another 25% from there. Every attempt at holding support on the way down becomes a hindrance on the way up. Moreover overcoming those resistances in turn becomes the opportunity.
Simply put, it should set a trend of higher lows to attack resistances one line at a time. Owning the shares outright is a viable thesis now.
Alternatively to that, owning long-dated call options would serve a similar purpose. My favorite way to be bullish is to sell puts below so I do not need a rally to profit. Those who are really aggressive in Dropbox stock can sell puts and buy calls to be long for free. The risk there would be to own the shares lower. But until then, they have no out-of-pocket risk whatsoever.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.
