Dropbox (DBX) shares fallout after second-quarter earnings represents more and more evidence to me that investor sentiment is shifting to value plays; and we had better get on board.
The company reported revenue and earnings results that actually beat market estimates. Despite that, the lack of profitability combined with the exit of the Chief Operating Officer is pushing the stock down. The company is basically a cloud company. With almost every major tech firm pushing their own cloud services, I worry that Dropbox's unique position could get squeezed over the long term. The convenience of their services for businesses is certainly a great thing, but the concept is replicable. Regardless, the lack of profits is what concerns me. We're seeing the signs from many other tech companies that the days of price appreciation without earnings growth are waning quickly.
Second quarter revenues included a 27% upswing year over year. The total group of paying users also increased to 11.9 million versus 9.9 million a year ago. Despite all the growth, the company still lost money. Total net income was negative $4.1 million. That's a marked improvement over last year's $26.4 million loss, but it still didn't do anything to justify paying $34 a share; explaining why the stock is down 9% today.
Because the gap is closing quickly, I do think there's potential here for Dropbox to start making money in the coming quarters, as estimates suggest. Even with non-GAAP estimates of $0.28, that gives Dropbox a price tag that's trading at over 100x forward fiscal earnings. I'm sorry but that's simply too high. It's no wonder this thing is pulling back. The stock fallout is just the latest in a long line of tech companies whose price tags have far exceeded the real earnings results. Netflix (NFLX) took a huge hit after reporting a user growth slowdown. Facebook (FB) , a company that could arguably move in the direction of cloud based products in the future, dropped after slower user growth. That hit came despite great earnings results. If profitable businesses are getting hit for high stock prices, there's no way Dropbox is safe.
Moving forward, it becomes a question of competition. Can Dropbox outmaneuver Alphabet's (GOOGL) GoogleDrive, and Microsoft's (MSFT) OneDrive? Let's not forget that these two players are making big strides in their online cloud businesses. As these firms begin pouring more funding and resources into the space, it doesn't bode well for the little guys. That's no insult to Dropbox. The company has a little over $500 million in cash; but that doesn't compare to the resources at Alphabet's disposal. Microsoft is looking to diversify as well, and they made big strides in growing cloud based services in the first half of the year. The company is doing over $100 billion in annual revenue now, and definitely has the means to dominate this space.
When looking Dropbox, you have to take these factors into account. If the stock were trading much lower, it would make more sense to me to take a swing here. The little guy that is competing with the big boys is always compelling. Unfortunately, at these prices, it just doesn't make sense.
A couple different things can probably happen from here on in. Dropbox could rally through the second half of the year if they start showing positive earnings per share. Unless they're GAAP included earnings, I'm not going to be impressed. Nonetheless, there's potential for this pullback to be a buying opportunity if market sentiment doesn't become too damaged. Personally, I think man of these tech stocks are about to have a bearish second half. Some think the small shifts into value based companies are not yet meaningful. I think this is the beginning of a full swing. The evidence is in the stock performance of the Twitter's (TWTR) , or the Snap's (SNAP) . They haven't delivered to expectations, and shareholder sentiment is finally starting to shift.
Despite the recent uptick from Elon Musk's privatization tweets and discussion, Tesla (TSLA) has been taking more and more scrutiny from analysts over the general lack of delivery on their goals. The market is starting to wane on speculation, and beginning to favor results and good pricing. To me, that makes it a dangerous time to own Dropbox. Their forecasting doesn't add up to what's on the plate in terms of the cost to own.
I think we'll see some earnings per share eventually, but the success is simply already baked into the stock. I'd wait for a much lower price point before thinking about this one. The share count keeps climbing as they finance their moves. Shares increased to 401.3 million in the second quarter versus 195.4 million a year ago. This in turn will put downward pressure on the stock price. If they do create profits, it will also diminish how those profits are divvied up on a per share basis. There's potential, but it's very expensive potential at the present time.