As Dropbox Heads into Earnings, It Desperately Needs a Win

As Dropbox Heads into Earnings, It Desperately Needs a Win

Dropbox, a consumer and commercial file storage and sharing service, will disclose its first-quarter profits tomorrow, and the stakes look to be pretty high for the former unicorn and now public firm. Dropbox is coming off a year of poor growth in the low teens, and growth in 2022 is expected to be much slower. Dropbox’s earnings release on Thursday may enhance the company’s growth story, improve its year-end projection, boost its stock price, and reassure investors. Alternatively, if Dropbox discloses profits that disappoint the financial community, the company’s stock price might plummet even lower.

The stock is now trading at a 52-week high of $33 per share. The stock was trading at $21.30 this morning, down almost 2% from its 52-week low of $19.90. Dropbox’s market capitalization is little over $8 billion. With a declining value, decelerating growth, and a stagnating share price, that type of performance attracts takeover offers, so Dropbox’s capacity to extract cash from its operational company might make it an appealing target for a hostile takeover.

The concept isn’t just a theory; former Dropbox competitor Box recently had a leadership spat with investors, while Zendesk’s success placed it at odds with outside investors, leading the customer service business to reject an acquisition bid. Dropbox might find itself in the crosshairs of private equity investors, with tech values way below previous historical highs, and a weak earnings report could spark off uncomfortable deal-making. Let’s speak about the company’s recent and predicted outcomes, its vulnerability, and who could be interested in buying it (if it comes to that).

In search of long-term growth, Dropbox reported $565.5 million in sales in the fourth quarter of 2021, up 12.2 percent from the previous quarter. Dropbox performed even better over the course of the year, growing by 12.7 percent to $2.158 billion in sales. Is there a lot of growth? No. Solid? Sure. However, when Dropbox provided predictions for 2021 during its final earnings conference, the company’s estimates for this year were less optimistic. 

Dropbox expects overall revenue of $2.32 billion to $2.33 billion in 2022, which translates to a 7.51 percent to 7.97 percent growth rate, which isn’t terrific. Single-digit growth is not a desirable environment for any public firm, unless it pays a large dividend and is happy to keep expenses low. Dropbox isn’t one of those businesses.

According to Yahoo Finance statistics, Dropbox’s Q1 revenue projection of $557 million to $560 million is within the range of current analyst predictions. At the same time, we’re not sure if investors would be excited if Dropbox reported $558.95 million in revenue. What would be a story-altering outcome for Dropbox? A beat on sales in Q1 and at least some modicum of guidance growth for the year, in our opinion, will help to break the funk. Otherwise, we might want to start a countdown clock.

Is it possible that buyers will start circling? Dropbox might be able to find a new home in a few areas. The most obvious is selling the firm to a financial organization, which is known as private equity. Such transactions often target slower-growing, cash-generating businesses that might handle a large debt load while still having a chance at lower costs or even faster development.