The stock market took a beating during the pandemic. Once the world shut down all stocks fell into a chasm at record speeds. However, the indices have recovered incredibly well and even set new records. Dropbox (NASDAQ:DBX) has not been this lucky. Dropbox stock is still 58% below its all-time highs. It is an improvement off of the March lows, but it’s nothing to celebrate yet.
The gist of today’s note is that there are better places to be than DBX. This has been my suspicion since the beginning. The explosion in demand for cloud stocks shined a light on it. While the cohort caught massive fire, Dropbox still cannot sustain its rallies. The market has spoken and it will take a catalyst to change its mind.
Although I feel for the investors who lost money from the highs, I feel vindicated a bit. I’ve been apprehensive about the upside potential for many reasons.
First and foremost, I don’t think they can battle toe-to-toe with the competition like Alphabet (NASDAQ:GOOGL,NASDAQ:GOOG) for example. In addition, they have many smaller worthy foes like Box (NYSE:BOX), to name one. The experts would split hairs over the niches that either those two have. To me, the concept is the same.
The big pain came last year in August. Savvy bulls should have booked their profits as Dropbox stock neared $27 per share. I wrote an article back then making that exact point. In it I cautioned about staying long and stressed the importance of stops.
In hindsight it’s easy to have opinions but in this case we laid it out in black and white.
There Is Support Below
The good news for Dropbox bulls now is that there is support below. The selling during the pandemic was harsh enough to create a true bottom. If markets in general continue to hold up this well, then DBX can finally find footing. However, onus is on management to hold up their end of the bargain. They cannot afford to disappoint Wall Street at all.
This week Dropbox will report earnings so there should be excitement around that. Not even the CEO of the company can forecast how the stock will move that day.
It’s not about how good the quarter will be, investors will react based on expectations. Case in point: last week Amazon (NASDAQ:AMZN) crushed all metrics and expectations and raised guidance, yet it sold off. For the short term, Dropbox stock will react in a binary way on Thursday. There will be no rhyme or reason for the direction of the knee-jerk reaction. Long-term, it will eventually revert to trading its fundamentals.
So far the results haven’t been too impressive so management has its work cut out for it. From the traditional sense, it’s expensive with a trailing 12 months price-to-earnings ratio of $225x. Somehow, the forward P/E is 20x. I find this discrepancy strange and I don’t believe it.
Luckily its price-to-sales is only 4x. This means that there isn’t a lot of hope baked into the current stock price.
There Are Better Places to Be Than in Dropbox Stock
To summarize my opinion today, I still haven’t shaken off my skepticism. If you were to force me to trade it I would use the options markets. There I can structure a trade that leaves a buffer between current price and my level of risk. Otherwise I find it easier to bet on other stocks that have clearer paths to success.
Yes, I would trade it, but it’s not a stock that I want to own for long. I would change my mind if management offers investors some hope with tangible milestones.
One of the byproducts of this horrific Covid-19 crisis is the urgency for the whole world to get online. Somehow the excitement did not light a fire into the demand for Dropbox products. Zoom Video (NASDAQ:ZM) is the poster child of this new trend. You don’t hear many talking about Dropbox and how they absolutely need it.
The bottom line is that if Dropbox stock is rallying, then so is the rest of the market. And for that reason alone I’d rather be in other stocks that have less downside risk. I’d even prefer owning the Invesco QQQ Trust (NYSEARCA:QQQ).
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.
