Friday, February 21, 2020

Dropbox Shares Spike on Q4 Beat, Threats Remain

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What’s happening: Shares of Dropbox spiked as much as 16% in extended trading after the cloud-based file-sharing service reported fourth-quarter results, beating both revenue and earnings estimates.

What happened: Dropbox surpassed its IPO price of $21 per share following an upbeat quarterly report. The San Francisco, California-based company saw an increase in paying customers, despite its price hike. Management’s announcement of a $600 million share buyback program and higher forecast also boosted investor sentiment.

While investors rejoice the recent results, Dropbox and other cloud-service providers face increasing security threats.

  • Dropbox reported a net loss of $6.6 million, versus a loss of $9.5 million in the same quarter a year earlier.
  • Dropbox’s adjusted quarterly profit came in at 16 cent per share, up from 10 cent per share in the same quarter in 2018. The figure was higher than the consensus estimate of 14 cents per share.
  • The company announced 19% growth in quarterly sales to $446 billion, beating expectations of $443 million.

Dropbox reported an increase in paying subscribers to 14.3 million at the end of the fourth quarter, versus 14 million users in the earlier quarter. Average revenue per paying user rose 5% to $125.

Why it matters: Despite higher prices, Dropbox maintained its trend of constant subscription growth in the latest quarter. The launch of Dropbox Spaces in 2019 lifted the company’s results. Dropbox Spaces allows its customers to build smart workspaces for mitigating technology-related distractions.

Rivals Google and Microsoft have been posing stiff competition for Dropbox, with their free cloud storage service. However, the launch of new features and a major portfolio revamp have given Dropbox an edge over competition. The company has been driving its bottom-line with a “freemium” model, which gives users free access to basic services but requires them to pay for additional services.

Management projected operating margins between 28% and 30% by 2024, raising the guidance from the previous range of 20% to 22%. The revenue guidance for Q1 and 2020 are at $452- $454 million and $1.89-$1.905 billion, respectively. Dropbox aims to achieve profitability on a GAAP basis by yearend.

Recent industry reports have indicated that the cloud storage service market is primed for major growth, which bodes well for Dropbox.

On the other hand, hackers are becoming more sophisticated in phishing, delivering malware and data theft, using the cloud to cover their tracks. There’s concern around cybercriminals increasingly using Dropbox, along with Google Drive and other cloud-based services. Recent news of a group of Chinese hackers relying on Dropbox file hosting and sharing service to carry out their malintent caused concern over the company’s image. In fact, this group of cybercriminals operate under the name DRBControl, with DRB being the short-form of Dropbox.

How shares responded: Dropbox shares had been on a downward trend since the company went public two years ago. The stock has tumbled around 27% over the last 12 months, significantly underperforming the S&P 500 index, which spiked 21.6% in the same period. Since the beginning of 2020, however, Dropbox shares have been on the path to recovery.

What to watch: The market will watch the Nasdaq 100, where Dropbox is a major constituent. Investors will keep an eye on services unveiled by rivals Microsoft and Google, as both are household names and their services are free. Reports on the growth of security threats will also be in focus.

The Markets Today

     

Investors will be watching US stocks today, amid fresh coronavirus concerns, as economic data from the country could provide some relief to investors.

Context: US shares closed lower on Thursday, with a majority of the declines coming in surprise moves. As the main catalysts for the downturn was unclear, there was speculation around sentiment being impacted by the spread of coronavirus outside mainland China.

Details: All major indices closed the day in negative territory, led by semiconductor and software stocks. The decline in yesterday’s trading pulled back the S&P 500 and Nasdaq 100 from Wednesday’s record closing highs. The Dow index fell over 128 points to close at 29,219.98, while the Nasdaq 100 and S&P 500 lost 66.21 points and 12.92 points, respectively.

Coronavirus has started to spread outside mainland China, with South Korea reporting a surge in confirmed cases. Following its first death from the virus, the South Korean government advised people in affected areas to remain at home. Two deaths were reported on cruise ship Diamond Princess in Japan. As of yesterday, China’s National Health Commission reported 118 more deaths and 889 new cases.

Steel stocks also declined, while telecom and real estate stocks ended the day higher. In US economic news, the Labor Department reported a rise of 4,000 initial jobless claims for the week ended February 15, which didn’t bode well for investor sentiment.

E-TRADE Financial shares were among the top performers yesterday, after Morgan Stanley announced plans to acquire the company. Tivity Health shares tumbled over 45% after the company reported downbeat quarterly results and issued a weak sales outlook.

The US dollar gained in late trading yesterday. The euro slipped to 1.0789 against the greenback, while the Australian dollar fell to 0.6614, from 0.6673 in the previous session. Yields on 10-year notes slipped 7 basis points to 1.52% for the week.

Why it matters: After a downbeat performance in Thursday’s session, all eyes are on the bunch of economic data scheduled for release today, including services, manufacturing and composite PMIs and existing home sales. Investors will also be focusing on economic reports from the Eurozone.

What to watch: The IHS Markit manufacturing PMI is expected to fall to 51.5 in February, from 51.9 in January. Preliminary estimates call for a decline in services PMI to 53, from January’s reading of 53.4. Analysts expect existing home sales to fall 1.8% to a seasonally adjusted annual rate of 5.43 million units in January, versus 3.6% growth in December.

Other Markets: European indices opened mostly lower on Friday, with the UK 100, German 30 and French 40 down 0.6%, 0.1% and 0.2%, respectively.

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What else to watch today

     

Indian foreign exchange reserves, Brazil’s current account, Canadian retail sales, Baker Hughes North American rig count report and speeches by various Federal Reserve Bank members and ECB’s Philip Lane.