Dragonfly 2022 Stock Pitch Competition – Investment Banking Stream

(DBX: NASDAQ)
Valuation date: 08/04/2022
Analysts: Terence Yeo, Cui Jing and Sameer Somani
 Pitch Summary
Recommendation: BUY Key Metrics
• Last Closed Price: $22.36(08/04/2022 - NASDAQ) Market Capitalization ($) 8.451B
• Target Price: $28.04
Shares Outstanding 295.34M
• +/- Potential: 25.4%
Float 283.55M
Investment Thesis Average Volume (10-day) ($) 2.59M
• Appropriate for the current macroeconomic landscape of monetary 52-week high low ($) 19.90-33.00
tightening amid fears that it may induce a recession – especially in the midst
P/E ratio (previous 12 months) 28.41
of a commodity-driven inflation spike
• Strong industry growth partly driven by new WFH trends in the post- EPS (previous 12 months) 0.85
pandemic workplace, especially for SMEs
• Promising growth and innovation including moves into the retail space

Catalysts
• End of Russia-Ukraine conflict allowing foreign cloud storage services to
enter Russia again
• Investigations on Microsoft on the breach of EU antitrust rules and anti-
competitive practices
Risks/Mitigating Factors
• Global chip shortage on Dropbox infrastructure
• Intensifying market competition – new challengers entering the market
• Energy crisis causing spikes in costs for the firm

Source: Dropbox.com, finance.yahoo.com

 Company Overview
Company Summary Business Model
• Founded in 2007 and listed on the NASDAQ in February 2018 • Dropbox has a freemium business model where free accounts with limited
• Dropbox is a US-based SaaS business, providing a collaborative platform that storage size are able to upgrade to different plans (personal or business) for
allows users to share and store files in the cloud, with an emphasis on more capacity and additional features. Dropbox’s current revenue comes
individual and SME users. from the conversion of free accounts to its paid services.
• Riding on the wave of the creator economy, the firm launched Dropbox • Dropbox is positioned uniquely as an open-ecosystem offering integration
Shop in April 2022, allowing creators to list their digital products on the with Google, Apple and Microsoft’s platforms. This moves Dropbox away
platform (not charging transaction fees currently). from a zero-sum competition with its competitors to allowing Dropbox to be
a supplementary product together with other cloud storage services
Recent M&A activity
• In Q1 2019 Dropbox acquired HelloSign for $230 million, as part of its
effort to target enterprise customers. HelloSign specialises in e-signature
solutions.
• In Q1 2021 Dropbox acquired DocSend for $165 million, a secure
document sharing and analytics company. DocSend helps customers across
industries manage end-to-end document workflows - from content
collaboration to sharing and e-signature - giving them more control over their
business results.
Key personnel
• Drew Houston – Founder and current CEO
• Tim Regan – CFO
• Timothy Young – President
 Company Performance
Usage Revenue
Dropbox has benefitted
from steady growth in its Dropbox has generated
premium user base with a strong and consistent
6-Yr CAGR of 17%. revenue growth, evident
The premium conversion from the $2B revenue
rate for the platform has generated during 2021
also increased from and a 6-Yr CAGR in
approximately 1.84% in revenue of 23.65%.
2015 to 2.21% in 2020.

• Although personal use accounts for a significant portion of Dropbox’s user The revenue growth can is
base, the company has amassed over 500,000 paying business users partially due to the growth
• Dropbox’s APIs have attracted over 750,000 developers, with the resulting in paying business and
integrations leading to 60B API calls each month (up 20% from 2020) premium users, but a
significant portion is due to
US vs. International
the growth in ARPU which
Dropbox’s revenue mostly has stabilized to around
originated from clients in the US, 4.5% year on year. The
however, this trend is reversing growth in ARPU is primarily
with international markets down to the expansion of
revenue increasing at a faster rate Dropbox’s services
relative to the US. attracting users to higher-
cost plans with additional
features.
Source: Dropbox.com
 Company Performance
Profitability Leverage and Liquidity
For the year ending The firm had been taking on
31/12/2021, Dropbox debt to finance operations
announced its first net and and investment in its early
operating profits in the firm’s years but now has switched
life with a net profit of to raising funds mostly
$335.8M. Positive net and through equity. The firm
operating profits would have recently raised $1.37B in
been generated in 2020, convertible 0% interest
however, the firm’s transition bonds lowering the WACC.
to remote working incurred Cheap access to credit allows
a large non-recurring • Interest coverage ratio (2021) = 54 for the firm to be more
expense. resilient to shocks.

The firm reached an 81% Free Cash flow for the firm is
Non-GAAP gross margin for predicted to reach $1B by
2021 with predictions of 2024 with strong FCF
slow but steady growth over margin growth in the past 5
the next years through gains years. High FCF margins
from economies of scale. mean the firm has the
ROE and ROA has been liquidity to continue to
growing as the benefits of operate even in weak credit
previously high Capital and equity markets.
Expenditure are realized.
All data has been corrected to exclude the single real estate impairment of $392.8M incurred in 2020 and the 0% convertible bond issuance of $1.37B in 2021
Source: Dropbox.com
 Company Performance
Liquidity and Efficiency Stock Performance
Dropbox in both measures The firm’s share price
has strong liquidity ratios tracked that of the wider
demonstrating the firm’s market, with stocks falling in
ability to comfortably cover early November 2021,
all short-term obligations following news from the
with its liquid assets. Both Federal Reserve. DBX fell
ratios grew by 40% from far more in response and
December 2020. failed to recover before the
Ukraine crisis forced stocks
to crash once more.

The firm has been looking to

• As of 11/2/2022, the firm authorized a significant share repurchase
increase efficiency in all
programme of $1.2B over the existing $1B authorized in 2021 (outstanding
areas recently, especially
shares have fallen 7% since January 2019)
when considering its
workforce, with the decision Net profit margins since
. to lay off 10% of its Q2 2019 of Dropbox
workforce early last year to have tracked those of the
cut costs and boost S&P 500 and have
profitability. The benefits can recently started to
be seen through the growing increase higher, while DBX
revenue and net profit per stock has suffered more
full-time employee. over the same period
leaving DBX under-priced.
Source: Dropbox.com, csimarket.com
 Industry Analysis
Industry Performance Dropbox Market Share
The BVP NASDAQ Emerging A survey in the US concluded
cloud index follows the that Dropbox is the largest
share prices of many large stand-alone personal cloud
and small-cap public cloud storage platform. Overall the
companies and hence is a platform is overshadowed by
good representation of the the integrated offerings from
industry-wide performance Google, Apple and Microsoft.
in equity markets. The index However, the dominant
has significantly market position of these
outperformed other integrated platforms may be
benchmarks in the past at risk from antitrust rulings
decade but has suffered as (see risks).
of late.
The firm’s focus on providing
The industry has benefitted services to SMEs and
from an increase in working individuals may pay dividends
from home post-pandemic, with the number of SMEs
as SMEs become globally growing significantly
increasingly reliant on cloud in the past 2 decades and a
storage due to its benefits possible trend in economic
while collaborating remotely. nationalism favouring SMEs in
lieu of the large multinational
corporations.

Source: statista.com, cloudindex.bvp.com

 Investment Thesis
Macroeconomic landscape Post-Pandemic WFH trends
• With the high inflation in many major western economies from the post- • The pandemic forced businesses the rethink their operations, leading to the
pandemic supply chain disruptions and now the commodity price shocks emergence of ‘working from home’ trends even after restrictions have been
stemming from the Russia-Ukraine war, the Federal Reserve among other lifted, given efficiency gains from lower costs and increased productivity for
central banks are looking to swiftly tighten monetary conditions. employees.
• The nature of the inflationary shock and the size of the tightening measures • Cloud storage by nature is accessible by multiple people at the same time
proposed may lead to a period of recession in the economy, with investors and facilitates collaboration even when working from home
looking for resilient firms to invest in through the high-risk period. • Dropbox is positioned perfectly to exploit these trends with a growing
• Therefore with its reasonable profit margins and strong cash flow, Dropbox business user base and its open ecosystem allows integration with other
will be able to resist the squeeze on margins in a volatile market. systems the firm may use.

Innovation and Expansion

• Dropbox has recently announced its move into the digital retail space with
Dropbox Shop allowing producers to securely sell digital products through a
credible marketplace.
• Digital products are items such as downloadable music, documents etc.
• Although there are no selling costs at present, success in the marketplace
could allow for charges to be introduced in the future and possibly additional
revenue to be generated.

Added to these factors, Dropbox’s relatively low share price increases the upside
potential of the investment significantly with the stock trading at 25% lower than
its implied value
 Comparable Company Analysis
TEV/Total Revenues LTM – Latest LTM EBITDA Margin %

TEV/EBITDA LTM - Latest LTM Levered Free Cash Flow Margin %

• Dropbox trades at a relative discount at 4.2x TEV/Revenue and 16x TEV/EBITDA compared to the average 6.5x TEV/Revenue and 34.9x TEV/EBITDA (ignoring
those with operating losses).
• Dropbox also boasts the highest EBITDA margin (21.2%) and second-highest levered free cash flow (31.59%)

Smartsheet and Nutanix TEV/EBITDA LTM ratios have been omitted due to negative EBITDA
Source: CapitalIQ
 Discounted Cash Flow Analysis

2020 2021 2022E 2023E 2024E 2025E 2026E

Total Revenue 1,913.9 2,157.9 2,319.7 2,493.7 2,680.8 2,881.8 3,097.9
Annual Growth 15.2% 12.7% 7.5% 7.5% 7.5% 7.5% 7.5%
Cost of Revenue 414.6 444.2 463.9 498.7 536.2 576.4 619.6
COGS Margin 21.7% 20.6% 20.0% 20.0% 20.0% 20.0% 20.0%
EBITDA 280.5 458.3 527.5 604.4 690.0 785.0 890.3
Margin 14.7% 21.2% 22.7% 24.2% 25.7% 27.2% 28.7%
Less: Depreciation and Amortization 159.3 151.4 150.0 150.0 150.0 150.0 150.0
EBIT 121.2 306.9 377.5 454.4 540.0 635.0 740.3
Less: Income Taxes (25.5) (64.4) (79.3) (95.4) (113.4) (133.3) (155.5)
Unlevered Net Income 95.7 242.5 298.2 359.0 426.6 501.6 584.8
Plus: Depreciation and Amortization 159.3 151.4 150.0 150.0 150.0 150.0 150.0
Less: Capital Expenditure (80.1) (22.1) (93.8) (100.8) (108.4) (116.5) (125.2)
CapEx Margin (4.2%) (1.0%) (4.0%) (4.0%) (4.0%) (4.0%) (4.0%)
Unlevered Free Cash Flow 174.9 371.8 354.4 408.2 468.2 535.1 609.6
Discount Factor - End-of-Period Convention 0.74 1.74 2.74 3.74 4.74
PV of Yearly Cash Flows 242.1 341.5 353.4 364.5 374.6

Source: CapitalIQ
 Discounted Cash Flow Analysis
Present Value o f Equit y at 04/ 07/ 2022

PV of 2022 Free Cash Flow Stub(1) 242.1

PV of 2023-2026 Free Cash Flows(1) 1,433.9
PV of Terminal Value(1) 9,575.1
Enterprise Value 11,251.2
Less:
Total Debt (2,368.7)
Preferred Stock 0.0
Minority Interest 0.0
Plus:
Cash and Equivalents 1,718.1
Equity Value 10,600.6

Shares Outstanding 378.0

Implied Per Share Value 28.05
Current Price 22.36
Premium/(Discount) to Current Price 25.4%

(1) Assumes 268 days remain in 2022; End-of-Period Convention for annual cash flows; Terminal value cash flow occurs on December 31, 2026.
Source: CapitalIQ
 Discounted Cash Flow Analysis
DCF Assumptions Sensitivity Analysis
Revenue Growth 7.5%
Gross Margin 80%
EBITA Margin Increase 1.5% annually till 28.7%
Equit y Value p er Share
Tax Rate 21% EBITDA Exit Mult ip le
Terminal EBIDTA Multiple 17.5x (Average LTM) 15.5x 16.5x 17.5x 18.5x 19.5x
8.82% 27.42 28.99 30.57 32.15 33.73
D&A $150m annually 9.82% 26.26 27.77 29.28 30.79 32.30
Risk-Free Rate (US 5Y Treasury) 2.70% W ACC 10.82% 25.15 26.60 28.05 29.50 30.94
11.82% 24.10 25.49 26.88 28.27 29.65
WACC 10.8% 12.82% 23.11 24.44 25.77 27.10 28.43
Beta (5Y Regression) 0.92
Capital Expenditure 4% of revenue (5-yr average)
Cost of Debt* 0%

*Convertible bond issued at 0% interest rate

Source: CapitalIQ
 Investment Catalysts and Risks
Catalysts Risks
• End of Russia-Ukraine conflict allowing foreign cloud storage services to enter • Global Semiconductor Shortage: The global shortage of semiconductors due
Russia again: With the departure of foreign cloud services like Google and to COVID-19 lockdowns and more recently commodity price hikes due to
Amazon, the demand for local storage has increased in Russia and the the Ukraine-Russia war could lead to higher capital expenditure and lease
capacity is expected to run out within the next two months, which provides payments for Dropbox’s supporting infrastructure.
significant growth potential for smaller services such as Dropbox to increase
their market share. • Intensifying competition: Dropbox faces competition from multiple tech
giants such as Google and Microsoft as well as smaller players such as Box
• Investigations on Microsoft on the breach of EU antitrust rules and anti- Inc. Intensifying competition is evident in Dropbox’s consistent falling
competitive practices: This could stop Microsoft from using its potentially revenue and user growth with larger companies like Microsoft being able to
dominant position in certain software markets to foreclose competition integrate their core services with cloud storage. With companies like Google
regarding cloud computing services. This could have long-term effects on introducing a new platform BigLake, Dropbox is expected to face slower
the competitive advantage of the largest 3 personal cloud storage platforms growth in the upcoming years if they fail to innovate and retain its
(Google, Apple and Microsoft) which is their ability to integrate their customers.
platforms within their eco-system while restricting integration from external
platforms such as Dropbox. • Energy cost spikes stressing profit margins: The commodity price spike
resulting from the Russia-Ukraine War could lead to significant cost increases
for the firm, with cloud storage being a highly energy-intensive process. This
is mitigated given the firm’s data centres are located in the US, nonetheless,
the effects of the war are felt globally.