Dropbox CEO Drew Houston and Dropbox co-founder Arash Ferdowsi (C) celebrate the launch of Dropbox’s initial public offering as they ring the opening bell at Nasdaq MarketSite, March 23, 2018 in New York City.
Company: Dropbox Inc. (DBX)
Business: Dropbox is a single organized platform where users can create content, access it from anywhere and share it with collaborators. DBX provides a collaboration platform worldwide. Its platform allows individuals, teams, and organizations to collaborate and sign up for free through its website or app, as well as upgrade to a paid subscription plan for premium features. As of December 31, 2020, the company had approximately 700 million registered users across 180 countries.
Stock Market Value: $12.4B ($31.05 per share)
Percentage Ownership: >10%
Average Cost: n/a
Activist Commentary: Elliott is a $40+ billion hedge fund with tremendous resources to analyze potential investments. They are a very successful and astute activist investor, particularly in the technology sector. Their team includes analysts from leading tech private equity firms, engineers, operating partners – former technology CEOs and COOs. When evaluating an investment, they also hire specialty and general management consultants, expert cost analysts and industry specialists. They often watch companies for many years before investing and have an extensive stable of impressive board candidates.
DBX was one of the highest profile private tech companies in the world when it went public in 2018 at $21 per share. Its 38-year-old founder and CEO, Andrew Houston, is one of the rising stars in the tech industry and sits on the board of Facebook. However, since going public Houston has not been able to come anywhere near expectations for the company and until Elliott started acquiring its shares recently, the company was trading under its $21 IPO price.
The typical activist play is to urge the company to improve margins, use cash to buy back stock, and cut costs. That is not what is going on here because management is already doing all of that. However, with Elliott involved, we expect those things to be done at a faster pace. There is also a secondary plan to sell the company that always looms in an activist campaign, particularly when Elliott is involved in a technology company.
While margin improvement and the sale of the company could certainly create value for shareholders, the real opportunity is to better monetize the user base. The company has 700 million users, but only 15 million (2.1%) are paying clients. Some 685 million users use it for free despite having a variety of personal and business subscription plans. Dropbox is a very sticky product and there is tremendous opportunity to patiently and gradually convert non-paying users to paying users by decreasing data limit for free users or charging minimal amounts for other Dropbox services, such as password management, secured file storage services or adding more functionality behind the paywall. If they were able to get $1 per month from an additional 10% of their user base, that would translate to $840 million of additional annual revenue, all of which would go directly to the bottom line at a company that right now has only $300 million of EBITDA. Even if this turns away some current users who refuse to pay, that does not cost the company any revenue, and, in fact, saves them costs of storing data for free. This is the best path for value creation and Elliott is very likely working with management amicably to accomplish this.
However, as we said above, having an activist involved often puts a company in pseudo-play, especially a technology company with 700 million users and only a $12 billion market cap. There are many strategic investors like Adobe and private equity investors who might be very interested at this price. However, anything that happens here will have to be with the blessing of management because the company has dual-share stock structure that gives its founder, Andrew Houston, 71.6% voting control.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.