Consumer and company file storage and sharing service Dropbox will report its first quarter earnings tomorrow, and for the former unicorn and current publicly traded company, the stakes seem pretty high.
Dropbox is coming out of a year of growth stalled in the early teens, with growth expected to grow even more slowly in 2022.
The performance reported by Dropbox on Thursday could bolster the company’s growth story, bolster its outlook for the year, encourage the stock price and reassure investors. Alternatively, the opposite is possible; if Dropbox reports earnings that disappoint the investment community, the company could see its share price fall further.
The company is at a 52-week high of $33 a share. The stock fell more than 2% this morning at $21.30, but rose from its 52-week low of $19.90. Dropbox has a market cap of just over $8 billion.
That kind of performance, with declining valuations, slowing growth and a stagnant stock price, is bait for takeover deals, meaning Dropbox’s ability to monetize its business could make it an attractive target for a hostile takeover.
The idea is not mere theorizing; Former Dropbox competitor Box recently tangled with investors over its leadership, and Zendesk’s performance put it at odds with outside investors, forcing the customer support company to fend off a takeover bid.
With technical valuations far from recent historic highs, Dropbox could be in the crosshairs of private equity firms, and a bad earnings report could be the start of some unwanted deals. Let’s talk about the company’s recent and projected results, how vulnerable it can be and, finally, who would want to buy it (when it comes down to it).
Looking for sustainable growth
In the fourth quarter of 2021, Dropbox reported revenue of $565.5 million, up 12.2% from the same period a year ago. For the full year, Dropbox fared even better, growing 12.7% and generating revenue of approximately $2.158 billion for the year.
Fast growth? New. Solid? Secure. But as Dropbox looked ahead in its guidance on its latest 2021 earnings call, the company’s expectations for this year were less encouraging. For 2022, Dropbox expects total revenues of $2.32 billion to $2.33 billion, numbers that add up to growth of 7.51% to 7.97%, which, to be blunt, isn’t great.
Single-digit growth isn’t a place a publicly traded company wants to hang around — unless it has a fat dividend and keeps costs down. Dropbox is not such a company.
It’s worth noting that Dropbox’s Q1 recommendation of $557 million to $560 million in revenue exceeds analysts’ current expectations, according to data from Yahoo Finance. At the same time, we wonder if investors would be excited if Dropbox posted in-line revenues of $558.95 million.
What would be a story-changing outcome for Dropbox? In our view, to break the slump, a beat on sales in the first quarter and at the very least some degree of expansion of the outlook for the year. Otherwise, we could start a countdown.
Can buyers start circling?
There are a few places Dropbox could find a new home. The most obvious is private equity: selling the company to a financial entity. Such deals usually target slower-growing, cash-generating entities that can support a heavy debt load and perhaps have a chance at lower costs or even accelerated growth.