Dropbox Can’t Seem to Take Advantage of Covid-19

If you had to pick some names for perplexing companies of 2020, Dropbox (NASDAQ:DBX) would certainly be in the running. As a modern workspace and cloud computing services specialist, DBX has strong implications for the new normal. That’s because before the pandemic, the underlying business was incredibly relevant to the burgeoning gig economy. So, you’d think that with rising novel coronavirus cases, Dropbox stock would be a no-brainer.

an image of the dropbox (DBX) website displayed on a smartphone screen
Source: Allmy / Shutterstock.com

However, looks can be deceiving.

Before we get into it, let’s back up for a moment. In February, I argued for investors to be cautious against Dropbox stock. Yes, DBX represented an important solution for gig workers. In that sense, the company is similar to Adobe (NASDAQ:ADBE) or Microsoft (NASDAQ:MSFT) — all three platforms allow people to work from just about anywhere.

Nevertheless, Covid-19 represented a once-in-a-century disruption. As such, I believed it didn’t matter that Dropbox was relevant to the next-generation workplace. The world was facing an unprecedented health threat. Therefore, investors would likely shift from a risk-on sentiment to risk-off. And for a brief moment, I was right to be cautious.

Of course, though, the market soon bounced back up from the March doldrums, sending many companies on an upward trajectory. In large part, this was thanks to good old-fashioned American resourcefulness. Collectively, our nation rolled up its sleeves and got to work — remotely.

And that — as InvestorPlace colleague David Moadel suggests — brought the upside catalyst pointing favorable at DBX. As Moadel puts it, “Given the world’s irreversible trend towards distributed work and collaboration, the reward-to-risk balance of Dropbox stock becomes increasingly favorable.”

Fundamentally, this narrative makes perfect sense for DBX. But for some strange reason, it’s not making sense on the technical front.

Dropbox Stock Has Become a Contradiction

In my previous write-up, I mentioned that Dropbox stock had come full circle. Right before the pandemic melted the market, DBX was trading above $19. As Covid-19 became part of our everyday reality, though, shares began pushing a resistance ceiling of $24. At the time of my last article, shares had crossed above the $20 mark.

However, I was still cautious on the stock because the math didn’t quite add up. Specifically, I wanted to see a strong correlation between the DBX price and new daily novel coronavirus cases. Instead, the calculated correlation was a weak, unconvincing relationship. That made me skeptical.

And if you look at the historical chart, I was right to be skeptical. In fact, recent data indicates that the company has turned into a somewhat contradictory investment.

From Sept. 8 to Nov. 16, new daily Covid-19 infections jumped over 548%. That should be positive for DBX because it raises the specter of longer, more restrictive mitigation protocols. But in that same period, Dropbox stock declined over 5%. Fundamentally, it doesn’t seem to follow logic.

Confusing matters more is the company’s encouraging third-quarter earnings report, where DBX beat sales and profitability estimates. Moreover, management’s Q4 guidance exceeded expectations across the entire spectrum. So what gives? Buried in the details could be the pivotal clue. According to SmarterAnalyst.com:

“Management told investors that internally, it has adopted a virtual-first work model, with this move expected to result in a one-time GAAP impairment charge of $400-450 million for Dropbox in the coming quarters.

“As a result of the COVID-19 pandemic, Dropbox has updated its product lineup to capitalize on the distributed work trend, with the company seeing the move to distributed work as analogous to the shift to mobile and adoption of the cloud.”

Here’s where it gets dicey for analysts. The concerted move toward a distributed work solution is a huge risk. Why? We don’t know for sure if the new normal is permanent. While companies accrued some benefits from the work-from-home transition, they also want to recapture the productivity and synergy they were able to create in-person.

Therefore, we should expect at least some companies to recall their workers, which may cut into Dropbox’s business. And that might turn its distributed work solution pivot into an expensive liability.

A Temporary Return to Relevancy

At the present juncture, DBX stock has become relevant again. In my opinion, novel coronavirus cases have soared to a point where mitigation is probably a necessity. Therefore, the work-from-home trend should continue to benefit Dropbox.

But how long this relevancy lasts may depend on the Covid-19 vaccine race. The potentially viable solutions created by Pfizer (NYSE:PFE), Moderna (NASDAQ:MRNA) and Novavax (NASDAQ:NVAX) have likely contributed to the lackluster movement of Dropbox stock. That’s because a mass-scale vaccine distribution spells a return to the old normal.

Back before Covid-19, investors considered fair value for DBX to be roughly where it is right now.

In other words, if you want to know where Dropbox is headed for the next several months, keep tabs on both vaccine efficacy and people’s willingness to take such a solution. If everything goes off without a hitch, you may want to reconsider DBX. On the other hand, if problems arise, the stock may have an extended lifeline.

In the nearer term, I believe sentiment is positive for Dropbox stock. At the very least, we should see a challenge to where the company was before Covid-19, between the $19 to $20 range. But be ready to roll over into something more reliable, especially if the vaccine and therapeutic fronts produce more wins.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.

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.

Article printed from InvestorPlace Media, https://investorplace.com/2020/11/dropbox-stock-cannot-seem-to-take-advantage-covid-19/.

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