Dropbox and Etsy Both Popped, but Only 1 Had a Reason

In this segment from Motley Fool Money, host Chris Hill and analysts Jason Moser, Jeff Fischer, and Aaron Bush consider a couple of major movers of the past week.

Shares of cloud storage specialist Dropbox (DBX 1.53%) rose 20% Thursday on heavy trading volume. The catalyst? Let's put it down to animal spirits.

Etsy (ETSY -3.25%), meanwhile, gained 35% on the week, powered by improved guidance for the fiscal year. But will the business model change behind that updated outlook deliver, or might management's expectations be too high?

A full transcript follows the video.

This video was recorded on June 15, 2018.

Chris Hill: Dropbox, the cloud storage company, went public back in March. On Thursday, shares of Dropbox rose 20% on very high trading volume. Jason, there was no news, of any kind. What is going on here?

Jason Moser: That's correct. It doesn't appear, at least, there was any news regarding this. Trading volume through the roof on Thursday and Friday. It's very difficult to pinpoint exactly what the cause of this is. I think that's where investors need to take a step back here and think, "Do the business fundamentals beget this kind of move?" It's hard to say that they do. This seems to be something inexplicable, almost. That's where investors need to be very careful, because it can be very tempting to want to jump on the bandwagon when stocks start going through the roof like this.

There's a lot of interest, obviously, in these new IPOs. Dropbox is a fairly new company in the public markets. I think it's a fascinating business from a number of perspectives. I think a lot of us know it as consumers, that free little Dropbox app that we've been able to use. To me, this is not a business that I'd have any interest in investing in yet, at least. I think, with the most recent quarter, they've showed they're doing some good things. Paying users a total of 11.5 million vs. 9.3 million a year ago, and that's a big metric for them. I think they have a big opportunity to grow that paying user base in the enterprise side.

But, we are in a market environment today -- I mean, we've been talking about this for three years now -- it just seems like the valuations are through the roof, and Dropbox is no exception. Perhaps you want to get it on your watchlist, but be very careful buying into companies that aren't making any profits yet.

Jeff Fischer: So many interesting IPOs recently. By recently, I mean the last three years. So many of them are in cloud and storage and cloud software, mainly. I'm more drawn to cloud software than I am to storage. In a sense, Dropbox will meld and be some of both.

But, I agree with you, Jason. You have to be careful. Try to choose the companies that have competitive advantages that can sustain. I don't know where storage is going to go, price-wise. I would think down. Over time, the cost of storage should go lower and lower. It's more or less a commodity. That said, what we could all be doing, perhaps, is under-estimating the size of the storage market. It could be much larger than estimated.

Hill: Shares of Etsy up 35% this week after the online retailer raised guidance for the fiscal year. Etsy plans to increase the transaction fee that it charges the sellers on its platform. Do they have that kind of pricing power?

Aaron Bush: It seems like it. They're raising the transaction fee from 3.5% to 5%, and they're also going to initiate a 5% fee on shipping costs. That might not sound like a lot, but let's say I have a $100 item with $5 shipping. Before, that would have cost $3.50 in fees. Now, that would cost $5.25. That's actually a 50% increase in the fees that it would cause the seller, and that's pretty substantial. So, it is no surprise that the company is raising guidance, with their revenue growth being forecasted from mid-20% growth to mid-30% growth. It's a meaningful change.

Some might view this as a risk, because it could infuriate sellers, and they might want to move elsewhere. But to me, this is a sign of pricing power, and that they have solidified a brand and a lead in this niche part of e-commerce, and they have a pretty dominant two-sided network effect there.

Lastly, I'll just say, this isn't the first controversial move the new CEO has made in this space. Last year, when he first came in, he laid off 15% of employees. This is another step in him reorienting Etsy to be more of a business-first culture. So far, in a short amount of time, he's unlocked a decent amount of value.

Fischer: It's interesting, because it's kind of the opposite approach of Amazon. Amazon will charge its Marketplace sellers more money, but you don't necessarily see it come through to the customer. In this case, I would think a lot of these Etsy sellers would push these price increases through, because they're significant.