Short-seller calls Dropbox a 'slowly melting business,' sees 25-60% downside
An activist investor said on Friday that he sees rising evidence of financial strain at Dropbox (DBX) — and is acting accordingly.
Ben Axler, the CIO and founder of Spruce Point Capital, explained to Yahoo Finance on Friday why the tech unicorn has become his latest short target. He noted that the file-hosting site is transitioning now to more of a "smart space" — and that’s creating trouble ahead.
"Dropbox was an early innovator in free storage, and we commend their entrepreneurship, but it's a maturing business, and we are seeing signs of strain," Axler, who’s a forensic accountant, told “The Ticker.”
The short-seller characterized Dropbox as a "slowly melting business" — with his bear case being a 25-60% downside risk as revenues decelerate.
Specifically, the analyst questioned the company's real cash flow. He zeroed in on two items in the cash flow statement, including stock compensation (the cash cost to repurchase stock from investors) and capital leases, which impacts free cash flow.
"So, whereas, the company would like investors to believe they have 30% free cash flow margin, we think it's closer to 6 or 7 (percent). So, that tipped us off,” Axler said. “And we see a business that's misunderstood by the Street," he added.
Spruce Point's research found evidence of rising customer churn, climbing acquisition costs to grow users, and increasing prices to grow average revenue per customer.
The company’s evolution is “moving them away from their core market. They started with retail customers, small businesses. Now, they're trying to move more into the enterprise space,” Axler explained.
“And, that's a different sell. They don't have an internal salesforce. They've generally used their growth through word of mouth and forwarding a free email to a friend,” he said. “That's a structurally different market."
What's more, Dropbox's core product of storage is under pressure from the likes of cloud computing behemoths like Microsoft (MSFT) and Google (GOOGL). And while tech stocks in general have been "razor hot," Dropbox has been underperforming, Axler noted.
"I think people realize that they are slowly losing their moat," he said.
Dropbox did not immediately return Yahoo Finance’s request for comment.
Julia La Roche is a Correspondent at Yahoo Finance. Follow her on Twitter.
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