Is the acquisition of DocSend good news for Dropbox stock?

By Rupert Hargreaves

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Acquiring DocSend could help Dropbox stock achieve strong returns by improving customer retention and reducing churn in the long run.

Dropbox stock has been one of the primary beneficiaries of the pandemic. Since the end of March last year, shares in the company have increased in value by around 70%. The pandemic has completely changed how companies and employees live and work worldwide.

Some estimates suggest that the world has gone through around a decade of technological change in just a few months.

Technological change

It is now commonplace for employees and employers to share and work on documents online. This has dramatically changed many industries, which previously relied on pen and paper and other outdated modes of communication and document storage.

Dropbox stock has surged as users have moved to its platform. According to the company’s fourth-quarter results release, revenue increased 13% year-on-year in the fourth quarter of 2020. The number of paying users using the company’s platform increased to 15.5 million, up from 14.3 million at the end of 2019.

While these figures look impressive, the company’s revenue growth slowed in its 2020 financial year. Revenue increased 15% overall, compared to 19% in 2019 and 26% in 2018.

That said, Dropbox’s ARPPU (average revenue per paying user) continued climbing. Its gross and operating margins also expanded throughout the year. The company’s gross margin averaged 80.1% for the fourth quarter of 2020, up from 77.6% in the same period a year ago. Meanwhile, ARPPU increased from $125 to £130.17 on average. The group’s operating margin rose to 25.3% from 15.6%.

The main problem facing Dropbox stock right now seems to be competition.

Competiton and Dropbox stock

While the business is one of the best-known cloud storage companies globally, it is facing fierce competition from competitors such as Microsoft, Alphabet, and Amazon.

Because of their size, all of these companies can provide a better service for customers at a lower cost.

Dropbox stock website on iMac in home office

Photographer: Annie Spratt | Source: Unsplash

But despite this competition, Dropbox still ranks second in the global cloud storage market after Google Drive, followed by Microsoft, privately held Egynte, and Box.

Management is expecting competition to remain a significant headwind to growth for the foreseeable future. The company anticipates revenue growth of just 11% year-on-year in the first quarter of 2021 and growth of 9% to 11% for the whole year. That’s down substantially from 2018’s reported growth rate of 26%.

Larger peers

Dropbox stock has to compete with Microsoft, Amazon, and Google, all of which can afford to run their cloud services at a loss to attract consumers. Their diversification means they don’t have to make money offering cloud products to customers. Ancillary services such as Microsoft Office or Google’s flagship search engine subsidizes cloud storage for customers.

Dropbox does not have this advantage. Its figures show just how expensive operating in this industry is without a cash cow to cover losses. Dropbox has remained unprofitable by GAAP measures ever since its IPO in 2018.

It posted a net loss of $256.3 million in fiscal 2020, compared to a loss of $57.2 million in 2019, mainly due to non-recurring real estate impairment charges in the fourth quarter. The company’s net loss widened to $345.8 million in the three months ended December 31, from $6.6 million last year.

New tools

To attract more paying consumers to its platform, the company has been adding features over the past few years. Towards the end of 2020, the group launched Vault, which adds an additional layer of security to sensitive documents. In 2019, Dropbox integrated the electronic document signing service HelloSign.

The company’s latest acquisition is DocSend, a secure document-sharing and analytics platform.

Dropbox acquires DocSend

DocSend is a high-tech solution to the problem of getting multiple users to sign a document in the most secure way possible while allowing the document owner to retain some level of control.

DocSend users can enable sign-in verification, control download capabilities, and easily require viewers to sign nondisclosure agreements. It also provides real-time analytics into who is viewing each document.

DocSend has 17,000 uses compared to Dropbox’s 525,000. The offering will help complement the group’s HelloSign product as well as Vault, which should help convince users about Dropbox’s security credentials.

The investment case for Dropbox stock

By acquiring DocSend, it’s unlikely the investment case for Dropbox stock will change overnight. It will hardly move the needle for acquired users, and it certainly won’t suddenly turn Dropbox into a profitable business overnight.

However, DocSend may help improve the overall attractiveness of the Dropbox platform. This could help reduce customer churn.

In conjunction with the rest of its holistic suite of collaboration tools, Dropbox has the potential to take market share from its larger competitors by offering something different and more diverse. It would also allow the business to reduce marketing spending.

More deals on the way?

This is unlikely to be Dropbox’s last acquisition.

A few weeks ago, Dropbox announced a $1.3 billion fundraising through convertible senior notes. Along with the $1.1 billion in cash and short-term investments already on its balance sheet, this should amount to almost $2.5 billion in liquidity. This gives the company plenty of firepower to both pursue acquisitions, or invest in research and development.

Management has also recently announced a $1 billion share repurchase program. However, in the past, management has been buying back Dropbox stock to reduce dilution from employee share options.

The group repurchased nearly $400 million in shares throughout 2020. Its number of outstanding shares increased almost 1% in 2020. Stock-based compensation expenses consumed 14% of revenue in 2020.

Dropbox stock: the bottom line

It seems unlikely that the acquisition of DocSend will dramatically improve the performance of Dropbox and the company’s shares in the near-term.

However, the additional functionality gives the company a bit of an edge over its larger competitors. In the viciously competitive cloud storage market, every advantage matters.

There could be further acquisitions on the cards as well from the company over the next few months. Additional products would add to the Dropbox offering, which may further improve customer retention and profit margins.

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IMPORTANT NOTICE AND DISCLAIMER

This article does not provide any financial advice and is not a recommendation to deal in any securities or product. Investments may fall in value and an investor may lose some or all of their investment. Past performance is not an indicator of future performance.

Rupert Hargreaves does not hold any position in the stock(s) and/or financial instrument(s) mentioned in the above article.

Rupert Hargreaves has not been paid to produce this piece by the company or companies mentioned above.

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