Jefferies Upgrades Dropbox On Attractive Valuation

Dropbox Inc DBX stock is limping into second-quarter earnings, but one Wall Street analyst says the pre-earnings weakness in Dropbox is a buying opportunity.

The Analyst

Jefferies analyst John DiFucci upgraded Dropbox from Hold to Buy and reiterated his $32 price target for the stock.

The Thesis

According to DiFucci, the recent Dropbox sell-off has given the stock an attractive valuation.

“Shares are -16% over the past week or so – on no material change, in our opinion – and are now attractively valued at 6.3x EV/C19E rev.,” DiFucci said.

He said Dropbox has an attractive free cash flow outlook that's unique among its software-as-a-service peers. Dropbox has a 29 percent FCF margin, well above both the 11 percent average of the SaaS group and even the 21 percent average of the best-of-breed companies.

In coming quarters, DiFucci said the pricing benefits from Dropbox’s two new subscription services launched last year will start reflecting in average revenue per user numbers, which should be a positive catalyst for the stock. Management has given positive commentary related to customer conversion rates to the new plans. In addition, management has said customers using Paper have been converting to higher-priced plans at a faster pace than those who do not use Paper.

DiFucci said these new product trends are positive indicators of Dropbox’s ability to innovate and expand its business in the long-term.

Price Action

Dropbox stock traded higher by 2.9 percent Wednesday following the upgrade, but remains down 12.8 percent overall in the last five trading sessions.

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