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Why Did Jefferies Upgrade Dropbox?

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Aug. 9 2018, Updated 9:01 a.m. ET

Jefferies: Dropbox trading at an attractive valuation

Previously in this series, we noted that Dropbox (DBX) stock has already risen 12.0% in August. While its stock climbed higher after Dropbox’s clarification with respect to the Harvard Business Review issue, its stock rose again after Jefferies analyst John DiFucci upgraded the stock from “hold” to “buy” on August 1.

DiFucci reiterated a price target of $32 for Dropbox. The analyst perceived the pre-earnings weakness to be a buying opportunity. DiFucci believes that Dropbox is trading at an attractive valuation and stated, “Shares are -16% over the past week or so – on no material change, in our opinion – and are now attractively valued at 6.3x EV/C19E rev.”

Jefferies also views Dropbox’s free cash flow margin to be significantly higher compared to its SaaS (software-as-a-service) peers. Dropbox has a free cash flow margin of 29.0%, which is almost triple the free cash flow margin average of 11.0% for other SaaS companies.

Of the 12 analysts covering Dropbox (DBX) stock, seven recommended a “buy,” four recommended a “hold,” and one recommended a “sell.” The average 12-month target price for Dropbox is $34.36, which indicates that the stock is trading at a discount of 15.0% to analysts’ estimates.

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Traction among customers

Analysts are optimistic about Dropbox as the company gains traction among its customers. Shared office space startup WeWork has already expanded its Dropbox deployment by more than 200.0% since the third quarter of 2017.

Dropbox started as a 30-user self-serve account within WeWork in 2015 and has since added 500 enterprise users over the last two quarters. Dropbox noted that edtech company 2U, which partners with universities, also increased its deployments significantly.

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