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Why Bernstein Is Bearish on Dropbox

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Aug. 7 2019, Published 4:13 p.m. ET

Shares of data storage company Dropbox (DBX) are down 4.14% as of 3:53 PM ET today. The stock took a hit after investment bank Bernstein initiated coverage on it with an “underperform” rating and a 12-month price target of $19.0. Dropbox shares are currently trading at $20.83.

According to a MarketWatch report, Bernstein analyst Zane Chrane stated, “Virtually all leading indicators of growth are negative. App monthly active users, daily active users, app downloads, number of app sessions, total time spent in app, and Google searches have all been declining in recent quarters while these same data for major cloud vendors have been much more positive.”

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Dropbox increased its subscription cost for Plus customers

The analyst also raised concerns about rising competition in the file storage space. Dropbox is competing with tech giants such as Microsoft (MSFT), Google, and Amazon in the market.

Dropbox has increased its pricing plan for Plus subscribers. The Dropbox Plus plan now costs $11.99 per month, up from its earlier price of $9.99 per month. While Plus subscribers will now get twice the amount of storage (2 TB), the increase could drive away price-sensitive subscribers.

According to Chrane, Dropbox can’t afford to raise prices due to competition. He raised questions about the company’s strategy and stated that global cloud-storage prices are falling. Switching costs for Dropbox subscribers are low, and they may well move to another file storage service.

Finally, Chrane stated that he expects the collaboration segment to be dominated by Microsoft and Slack. He wrote, “The fact that Dropbox does not have a fully developed enterprise sales organization puts them at a significant disadvantage in a market where network effects give first movers a huge advantage.”

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Dropbox will announce its second-quarter results tomorrow

Dropbox will announce its second-quarter results on August 8. Analysts expect the company’s revenue to rise 18.2% to $400.91 million and its EPS to fall 18.2% to $0.09 in the second quarter. While Dropbox has over 500 million registered users, only a small portion (13.2 million) are paid subscribers. The company has the opportunity to grow its sales at an exponential rate if it can manage to monetize its user base.

Dropbox stock has underperformed the market. It’s up just 1.5% year-to-date and is trading below its IPO price of $23 per share. Overall, Wall Street remains bullish on DBX. Analysts have a 12-month average target price of $32.27 on the stock, indicating a potential upside of 55.4% from its current price.

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