Cloud computing stocks Box (BOX 1.80%) and Dropbox (DBX +0.68%) compete in the cloud content management market. Both companies provide software as a service (SaaS), known otherwise as enterprise file synchronization and sharing. In simple terms, this means uploading files to the cloud, storing them there, and sharing them with others.
The cloud-based file sharing market is crowded and competitors in the business range from a bevy of small private companies to a smattering of mega cap giants like Amazon's Amazon Drive, Microsoft's OneDrive, and Alphabet, Inc.'s Google Drive (I'm sure brand consultants labored tirelessly to conceive those inimitable names).
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Investors looking to own a cloud-based file sharing stock should focus on Box and Dropbox. Both companies focus solely on the cloud-based workplace automation and collaboration market. They are "pure play" providers. Here's how they compare.
Box and Dropbox are similar in some respects
Box and Dropbox allow consumers and large enterprises to securely sync and share documents, photos, and videos across multiple devices. Their corporate customers include an impressive roster of Fortune 500 companies. Ultimately, these large-scale businesses are their primary targets. They compete for their customers by offering similar product lines.
Both Box and Dropbox have open architectures that aren't dependent on a specific platform or application. This allows them both to integrate easily with other cloud services their customers use. They both make it possible for their customers to accelerate business processes and empower workforce collaboration. And they each provide a high level of data security. But this is largely where the similarities end.
Dropbox has a Better Enterprise Offering Than Does Box
Dropbox offers one of the fastest sync algorithms on the market. Dropbox invented the method that allows you to sync files to the cloud, and their algorithms are used by nearly all cloud service providers. Box doesn't use the same algorithms, so syncing files to the cloud is slower.
Dropbox also makes it easier for teams to work together. Users can collaborate on a sharing page that makes company information easier to access. Box doesn't do this. What's more, Dropbox lets teams coordinate tasks and timelines and communicate with each other in real time. Dropbox can be integrated with other cloud providers' apps to allow teams to upload and download content, share it, and collaborate and comment on it regardless of the platform it originated from.
Teams using Dropbox can open Microsoft and Google files (Docs, Sheets, or Slides), and can work across applications that couldn't otherwise talk to each other, and can access files wherever they are saved: in the cloud, on a hard drive, or on some other device.
Finally, while Box has been in business a couple of years longer than Dropbox, Dropbox has done a much better job branding itself with both consumers and businesses.
Dropbox is Executing Their Business Model Better Than Box
Given the two companies' similarities, one would expect that their operating numbers would likewise be similar. But a comparison of some basic fundamental metrics shows that Dropbox is much healthier than Box. The table below offers a glimpse into the short-term financial health and operating efficiency of each company.
DATA SOURCES: RESPECTIVE COMPANY'S 10-QS AND ZACKS INVESTMENT RESEARCH. CHART BY AUTHOR.
While neither Box nor Dropbox is yet profitable, I believe Dropbox will get there first. Dropbox isn't profitable from the perspective of Generally Accepted Accounting Principles (GAAP). This standard forces companies to report non-cash expenses and one-time charges that are not reflective of their ongoing operations. So a company that is cash flow positive and making a profit from its regular business endeavors may still report a GAAP loss because of an anomalous event.
In Dropbox's case, this means that recognizing non-cash expenses in the quarter ended June 30, 2019 results in a GAAP net loss of $21.4 million. Add back stock-based compensation ($68.1 million) and other non-cash, non-GAAP expenses (which totaled -$4.7 million) and Dropbox's real cash profit (on a non-GAAP basis) was $42 million.
Box's profit problem is different. It's structural, not the result of an accounting reconciliation. In the quarter ended April 30, 2019 Box reported a loss on both a GAAP and non-GAAP basis (-$0.25 versus -$0.03, respectively). Here's why.
As a percentage of gross profit, Box spends almost twice as much on Sales & Marketing expenses as does Dropbox (68.96% vs. 35.95%). But that higher spending hasn't contributed to higher sales growth. Revenue is accelerating at both companies, but Dropbox's annual sales have been nearly twice those of Box's revenues since 2015. And Dropbox is growing faster. The latest reported quarter for each company showed that Dropbox grew revenue by 18.37%. Box reported sales growth of 15.99%. So, Dropbox is either getting a better return on their sales and marketing spending, or the market is saying that they have a better product than Box.
Dropbox is also managing its growth more efficiently. In its most recent quarterly report, Dropbox showed it generated more than $95 million in free cash flow. Box generated just $13.4 million. More importantly, Dropbox generates nearly three times as much free cash flow per dollar of revenue than does Box. Finally, Dropbox is also investing more heavily in its future than Box is. Dropbox spent about $162 million on research and development in the most recent quarter. Box spent right around $46 million. As a percentage of each company's gross profit those numbers represent 54% and 40% respectively. So, Dropbox is spending more than Box is on research and development of new product offerings -- and they are doing it on both an absolute and relative basis. I think this bodes very well for Dropbox's future.
The bottom line is that Dropbox stock is a better investment than Box. Don't forget that there are a lot of players in this space. So an investment in Dropbox is still not without risk. But investors looking to gain exposure to a pure play in the enterprise file synchronization and sharing business, Dropbox is my hands-down favorite between these two names.
