Dropbox Holds 'Margin Expansion Opportunity,' BofA Says In Upgrade

File sharing and storage company Dropbox Inc DBX issued disappointing first-quarter guidance Thursday, sending its shares reeling. One Bank of America Merrill Lynch analyst sees a buying opportunity in the dip. 

The Analyst

BofA's Justin Post upgraded shares of Dropbox from Neutral to Buy with an unchanged $33 price target.

The Thesis

Dropbox's fourth-quarter revenue, non-GAAP earnings per share and average revenue per user all came in above Street forecasts, signaling that the company is executing on its subscriber upsell strategy, Post said in a Friday note.

Yet deferred revenue and billings trailed expectations due to a mix of forex headwinds and a growing mix of monthly versus annual subscribers, the analyst said.

Many of the fourth-quarter headwinds are short-term in nature, Post said. Paid user growth, which decelerated in the fourth quarter due to tough comps, should stabilize in 2019, as the company is coming off four quarters of 400,000 paid subscriber adds, he said. 

"We are raising 2019 and 2020 revenue estimates and see opportunity for material margin improvement in 2020 on easy comps."

BofA sees the 10 percent stock decline since the IPO as an attractive buying opportunity given the research firm's expectations of "stabilizing paying user growth, margin expansion opportunity into 2020 and attractive valuation."

BofA is constructive on Dropbox' fundamentals and projects opportunities for accelerated organic growth in subscribers and long-term monetization potential due to transition to business plans.

"We think [the] stock should trade in-line with SaaS peers given [the] margin expansion opportunity." 

The Price Action

Dropbox shares were down 8.19 percent at $23.50 at the time of publication Friday. 

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Photo courtesy of Dropbox.