Dropbox (DBX +0.44%) is a big name when it comes to online storage solutions, but its recent results have cast a cloud over just how much growth the company may be able to generate. But with the stock down more than 20% since July, Dropbox is not too far away from its 52-week low, and this could be a good opportunity to buy it on a dip. Let's take a look at how the company has been doing of late to see whether it's a good buy today or if its recent decline could be the start of a much bigger sell-off.
Poor user growth sends investors into a panic
It was back in August that the wheels started to come off for Dropbox. Despite the company beating expectations for Q2, the big concern for investors was that Dropbox wasn't generating enough growth, specifically among paid users. With a 3% increase in paying users from Q1 and a 14% improvement from the prior year, the company has continued to show good, modest growth.
The one metric in Q2 that the company did miss estimates on was average revenue per user. During the quarter, Dropbox averaged $120.48, compared to expectations of $120.8. While this may seem like a minimal miss, the problem is that with the company's net loss growing from $4.1 million a year ago to $21.4 million, a lot is going to have to go right for Dropbox to be able to reach breakeven anytime soon.
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Although Dropbox has been making strides over the years in paring its losses, the setback in Q2 combined with the soft growth numbers likely put investors on high alert, perhaps questioning whether profitability is attainable. While the company continued to show improvement in Q3, it was yet another quarter where losses were larger than in the prior year.
Lack of moat may be the biggest challenge for the company
Whether Dropbox will be able to continue growing at a high rate is a very reasonable question for investors to be asking. After all, with Google, Microsoft, Amazon, and many other companies offering consumers online storage solutions, Dropbox is facing some tough competition these days. And it doesn't have enough of a moat, or competitive advantage, that it can withstand the lower prices and more attractive options that some of the big tech companies can offer.
Microsoft, for instance, includes cloud storage with its Office 365 software, making it a very appealing option for price-conscious consumers. That's something that would be difficult for Dropbox to compete with, since it doesn't have an office suite or a broader array of products and services that it can bundle together.
The advantage Dropbox has is that it was one of the first movers in this space many years ago, so it has a lot of loyal users who continue to use its service and would rather stay put than switch. But as is evident from its paid user growth, the company has been running into some challenges. There are simply too many options out there, and for Dropbox to remain competitive, it may need to resort to lowering its prices or improving its offers. Neither would do the company's bottom line any favors.
Why the value is still too rich today
With no earnings and no guarantee that profits will arrive anytime soon, investors are paying a hefty 10 times book value for a company that may have seen its best days. Unless Dropbox can prove to investors that it has found a way to be consistently profitable or a way to reenergize its growth among paid users, it'll be hard to justify buying shares of the company today even if the stock continues to fall.
