Activist fund Elliott Administration may push Dropbox to spice up profitability

Enterprise: Dropbox is a single organized platform the place customers can create content material, entry it from anyplace and share it with collaborators. DBX offers a collaboration platform worldwide. Its platform permits people, groups, and organizations to collaborate and join free by way of its web site or app, in addition to improve to a paid subscription plan for premium options. As of December 31, 2020, the corporate had roughly 700 million registered customers throughout 180 nations.

Inventory Market Worth: $12.4B ($31.05 per share)

Proportion Possession: >10%

Common Price: n/a

Activist Commentary:  Elliott is a $40+ billion hedge fund with super assets to investigate potential investments. They’re a really profitable and astute activist investor, notably within the expertise sector. Their crew contains analysts from main tech personal fairness companies, engineers, working companions – former expertise CEOs and COOs. When evaluating an funding, additionally they rent specialty and common administration consultants, knowledgeable price analysts and trade specialists. They usually watch corporations for a few years earlier than investing and have an intensive steady of spectacular board candidates.

DBX was one of many highest profile personal tech corporations on the planet when it went public in 2018 at $21 per share. Its 38-year-old founder and CEO, Andrew Houston, is among the rising stars within the tech trade and sits on the board of Fb. Nevertheless, since going public Houston has not been in a position to come anyplace close to expectations for the corporate and till Elliott began buying its shares not too long ago, the corporate was buying and selling beneath its $21 IPO value.

The everyday activist play is to induce the corporate to enhance margins, use money to purchase again inventory, and reduce prices. That’s not what’s going on right here as a result of administration is already doing all of that. Nevertheless, with Elliott concerned, we anticipate these issues to be achieved at a sooner tempo. There’s additionally a secondary plan to promote the corporate that all the time looms in an activist marketing campaign, notably when Elliott is concerned in a expertise firm.

Whereas margin enchancment and the sale of the corporate may definitely create worth for shareholders, the true alternative is to higher monetize the consumer base. The corporate has 700 million customers, however solely 15 million (2.1%) are paying purchasers. Some 685 million customers use it free of charge regardless of having a wide range of private and enterprise subscription plans. Dropbox is a really sticky product and there’s super alternative to patiently and steadily convert non-paying customers to paying customers by lowering knowledge restrict free of charge customers or charging minimal quantities for different Dropbox companies, akin to password administration, secured file storage companies or including extra performance behind the paywall. In the event that they had been in a position to get $1 per thirty days from an extra 10% of their consumer base, that may translate to $840 million of extra annual income, all of which might go on to the underside line at an organization that proper now has solely $300 million of EBITDA. Even when this turns away some present customers who refuse to pay, that doesn’t price the corporate any income, and, in truth, saves them prices of storing knowledge free of charge. That is the perfect path for worth creation and Elliott could be very doubtless working with administration amicably to perform this.

Nevertheless, as we mentioned above, having an activist concerned usually places an organization in pseudo-play, particularly a expertise firm with 700 million customers and solely a $12 billion market cap. There are various strategic buyers like Adobe and personal fairness buyers who could be very at this value. Nevertheless, something that occurs right here must be with the blessing of administration as a result of the corporate has dual-share inventory construction that offers its founder, Andrew Houston, 71.6% voting management.

Ken Squire is the founder and president of 13D Monitor, an institutional analysis service on shareholder activism, and the founder and portfolio supervisor of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.