Dropbox (DBX) stock price has been boring since the company went public in 2018. It has remained largely unchanged even as its annual revenue has risen gradually to over $2.5 billion. Also, the company has continued to underperform Box, one of its top competitors that has risen by 25% this year.
Dropbox layoffs
The main catalyst for the Dropbox this week was its decision to announce that it will slash about 25% of its workers in a sign that its business is no longer growing.
In the statement, the company noted that it was in a transition period as its business moves from a growth phase to maturity.
The new 20% layoffs come a year after the company slashed 16% of its workers. In a statement, Drew Houston agreed that its business was slowing and that the organisational structure had become more complex. He said:
“But external factors are only part of the story. We’ve heard from many of you that our organizational structure has become overly complex, with excess layers of management slowing us down.”
Major challenges remain
Dropbox operates in one of the toughest businesses to be in today. Its main product allows companies and individuals to store and share files in its cloud platform.
Users can access these files at any time, which is a good thing now that data has become an important part of everyone.
The challenge, however, is the fact that the file storage industry has become commoditised, with big companies having a big market share.
A good example of this is Apple, which sells products like the iPhone, iMac, and iPad, all of which come with iCloud installed. As such, instead of buying a Dropbox subscription, most people just pay for the iCloud.
Google is also a big player in the file storage industry through its Google Drive feature, which is also linked to Google Photos and other applications. The same is also true with Microsoft, which has OneDrive and Amazon.
Dropbox and Box have attempted to move diversify their operations by focusing on corporate customers. For example, Dropbox introduced Paper, a Google Docs-like solution for collaboration. It also introduced eSignature, replay, and Dash solutions.
The challenge is that many companies are working to unify their subscription solutions. As such, those firms that use Google Cloud will likely use its Drive solution, while those using Microsoft Azure are opting for OneDrive.
Read more: Elliot Management reveals a huge stake in Dropbox – time to buy?
Dropbox’s business has stalled
The other important issue is that the company has struggled to move most of its free subscribers to become premium members. In the last quarter, the company noted that it had over 700 million registered users and 18.2 million paying users.
At the same time, like other firms in the technology industry, Dropbox has pivoted to artificial intelligence (AI) by launching some features like an AI universal search. The issue is that its AI investments will unlikely lead to more users and revenues.
Additionally, Dropbox is unlike other SaaS companies like Salesforce in that its probability for upselling is more difficult.
The most recent financial results showed that its revenue grew by 1.9% in the second quarter to $634 million. This growth happened as the number of paying customers rose from 18.04 million in Q2’23 to 18.22 million.
Analysts expect that Dropbox’s business will be stagnant for a while. The average estimate for the upcoming results is that its revenue rose by just 0.6% to $636 million.
For the year, its revenue is expected to be $2.5 billion followed by $2.6 billion in the next financial year.
Therefore, I believe that Dropbox’s decision to slash workers and focus on profitability, while difficult, is the right thing to do.
Cost-cutting will make it a highly profitable company. For example, its annual profit in 2023 stood at $453 million, a figure that will continue rising as the firm focuses on profits.
These measures could also make it a viable acquisition target since it also has a strong balance sheet. It has over $1.2 billion in cash and short-term investments and $1.3 billion in long-term debt. As such, a potential acquirer would spend just a few years before breaking even.
Read more: Nvidia just partnered with Dropbox on AI tools: find out more
What next for the Dropbox stock?
DBX chart by TradingView
Dropbox stock could come under pressure after announcing the 20% workforce reduction ahead of its earnings next week. This could be a sign that the management has seen that its business is not doing well and are preparing the markets.
The daily chart shows that the DBX share price has formed an ascending wedge pattern, a popular reversal sign. Therefore, there is a likelihood that it will soon have a bearish breakout as sellers target the next key support at $24.45, its highest point on April 30th.
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