Should Investors Buy The Dip In Dropbox? 4 Analysts Weigh In

Dropbox Inc DBX shares moved lower in reaction to second-quarter results that came in better-than-expected but were accompanied by an announcement of Chief Operating Officer Dennis Woodside's departure.  Should investors take advantage of the dip? Four street analysts gave their take after the print. 

The Analysts

• Macquarie Capital Markets' Sarah Hindlian maintained an Outperform on Dropbox's stock with a price target lifted from $36 to $38.
• Canaccord Genuity's Richard Davis maintained a Buy with a price target lifted from $36 to $38.
• RBC Capital Markets' Mark Mahaney upgraded the stock from Sector Perform to Outperform with a price target lifted from $34 to $36.
• DA Davidson's Rishi Jaluria maintained a Buy with an unchanged $36 price target.  

Macquarie Sees Solid Results

Dropbox's "solid" earnings report was highlighted by multiple encouraging metrics, Hindlian said in a note. They include:

• 27.2-percent year-over-year revenue growth to $339.2 million.
• Better-than-expected revenue from paid subscribers that grew 19 percent to 11.9 million.
• Notable upside to average revenue per user at $116.70 versus expectations of $113.10.
• Gross margin upside in the quarter from unit cost efficiency gains.

Canaccord: Overreaction In Stock Move 

Dropbox delivered "everything we had hoped for" in the quarter, although the announcement of Woodside's departure initially concerned investors, Davis said in a note. Management turnover is not only normal but healthy for a company "because it prevents ossification," the analyst said. 

The bullish case for Dropbox remains unchanged, and the stock's decline represents a "gift" for investors who are constantly hunting for stocks on sale — which is "what we believe describes Dropbox," Davis said. 

Related Link: The Dropbox IPO: Everything You Need To Know

RBC Increasingly 'Impressed'

Dropbox's sell-off can be attributed to the executive departure and the absence of a notable lift in operating income guidance, Mahaney said in the upgrade note. Woodside's departure after four years with the company is an "entrepreneurial itch" transition and the absence of an operating income boost should be interpreted as "conservatism more than anything."

Dropbox's earnings report should leave investors "increasingly impressed" with its business and financial model of "internet scalability with SaaS predictability," the analyst said. The company continues to target a large total addressable market and remains the clear leader, he said. 

The Q2 report and impressive ARPU performance should pave the way for "very robust" revenue growth, Mahaney said. The Aug. 23 lockup expiration date merely represents a short-term headwind that investors should overlook in favor of the longer-term picture, he said. 

DA Davidson: 'More Positive'

Exiting Dropbox's earnings report, investors should feel "more positive," and the sell-off represents an ideal buying opportunity, Jaluria said in a research report. The company not only "significantly overachieved" on margins in the quarter, but technology advancements like shingled magnetic recording are likely to help optimize future costs, he said. 

Dropbox's differentiated strategy and leadership status makes the stock look attractive at its current 31 times EV/2019E FCF multiple, and D.A. Davidson's $36 price target implies a multiple of 36 times — which is in-line with Dropbox's high-growth peers, Jaluria said. 

Price Action

Dropbox shares were falling 9.66 percent to $31.10 before the close Friday. 

Related Link: Jefferies Upgrades Dropbox On Attractive Valuation

Photo courtesy of Dropbox.