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Dropbox vs Box: Which Cloud Storage Stock Could Fetch Higher Returns?

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TipRanks
·6 min read
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The coronavirus pandemic accelerated the transition to the cloud as enterprises across the world adopted remote working trends. Gartner estimates that global end-user spending on public cloud services will grow 18.4% to $304.9 billion this year. The research firm expects the proportion of enterprise IT spending on cloud computing to continue to increase and account for 14.2% of the overall global IT spending in 2024, compared to 9.1% in 2020.

Using TipRanks Stock Comparison tool, we will find out how Dropbox and Box have fared recently amid the rising demand for cloud services to select the stock offering a more compelling investment opportunity.

Dropbox (DBX)

Dropbox, which calls itself “the world’s first smart workspace”, is one of the leading players in the cloud storage and content management space. It boasts over 600 million registered users - including users of the company’s free plan - across 180 countries. As of the end of 3Q 2020, Dropbox had about 15.3 million paying users.

The company’s 3Q results beat analysts’ expectations, with revenue growing 13.8% year-over-year to $487.4 million (though the growth rate decelerated compared to 16.4% in 2Q). The 3Q top-line gained from a 9% increase in paying users, a rise in the price of the Plus plan, and a favorable mix of sales from higher-priced subscription plans.

Furthermore, ARR (annual recurring revenue) rose 12% to $1.98 billion. The 3Q adjusted EPS doubled to $0.26 compared to the same period last year as the company's adjusted operating margin expanded.

Coming now to long-term goals, Dropbox targets an operating margin of 28%-30% and an annual free cash flow of $1 billion in 2024. (See DBX stock analysis on TipRanks)

On Jan. 13, Dropbox announced its decision to cut down its workforce by about 11%. The company believes that it requires fewer resources to support its in-office environment. It also announced the departure of Olivia Nottebohm as COO effective Feb. 5, 2021.

Commenting on the streamlining measures, Canaccord Genuity analyst David Hynes believes that the workforce reduction plan is part of the new CFO Tim Regan’s commitment to meet the company's 2024 profit targets. After talking to management, Hynes said that a portion of the savings will likely be reinvested in faster-growing parts of the business, like HelloSign.

Following the latest cost-cutting move, the analyst's view on Dropbox remains “little changed.”

"The challenge these days in software is that growth is in vogue, almost irrespective of price, and in that kind of tape, a stock like DBX is going to underperform (ignoring speculation of an M&A buyout),” according to Hynes.

Looking ahead, analysts will be focusing on what revenue growth will look like between now and 2024, with the bears anticipating a deceleration to the mid-single digits, while the bulls expect low-double digits growth. According to Hynes, the latter is more likely. However, he cautioned that he “can’t say this with 100% conviction.” Bottom-line, the analyst remains bullish and reiterated a Buy rating on the stock with a price target of $30.

The rest of the Street has a cautiously optimistic outlook on the stock. The Moderate Buy analyst consensus is based on 4 Buys, 1 Hold and 1 Sell. The average price target stands at $27.20, which reflects upside potential of about 20% over the coming year. That's after shares have already gained 26% over the past year.

BOX (BOX)

Box has been benefiting from the demand for its cloud content management product suite as enterprises are prioritizing the increased need for digital transformation. At the same time though, demand from SMB (small and medium-sized businesses) customers has been impacted by COVID-19 headwinds. On the company's 3Q FY21 (ended Oct. 31) conference call, Box reported a recovery in SMB demand.

The company’s 3Q FY21 revenue grew 10.6% year-over-year to $196 million and surpassed analysts’ expectations, though the growth rate slowed down compared to 11.4% in 2Q. The number of paying organizations increased 3% in the quarter. The company ended 3Q FY21 with an annualized net retention rate of 103%, which was lower than the 104% rate recorded in 3Q FY20.

On a reported basis, Box was unprofitable in 3Q FY21. However, excluding one-time items, the company flipped to an adjusted EPS of $0.20 in 3Q FY21 compared to an adjusted loss per share of $0.01 in 3Q FY20. The bottom line benefited from a notable improvement in adjusted gross and operating margins.

Going forward, the company seeks to enhance its profitability by optimizing workforce expenses, improving gross margins by shifting more toward the public cloud and adopting an ROI (return on investment) based approach to all areas of spending. (See BOX stock analysis on TipRanks)

Last month, Oppenheimer analyst Ittai Kidron said that he was “incrementally positive” on the stock following investor meetings with the company’s CEO and CFO. Kidron believes that the SMB churn appears to be gradually mitigating. The analyst noted that the company’s OpEx (operating expenses) spending remains under control with increases expected to be gradual.

Kidron sees more room for stock gains as pandemic-induced headwinds subside and continues to believe that “management has made the right strategic decisions (product/GTM [go-to-market]), can improve retention rates over time, see a rise in large deal count, and continue with its planned margin expansion as Suites/platform selling gains more traction with a larger number of customers.” The analyst reiterated a Buy rating with a $24 price target.

Overall, the stock scores a Strong Buy analyst consensus backed by 3 Buys and 1 Hold. Shares have advanced about 11% over the past year and the average price target of $23.67 indicates upside potential of 31.5% from current levels.

Conclusion

Even as the demand for cloud storage and content management services looks promising, Dropbox and Box face intense competition from the likes of Google Drive and Microsoft’s OneDrive. Dropbox has a larger market share than Box. That said, the Street's sentiment appears to be more bullish on Box right now and the average analyst price target indicates a higher upside potential in the stock compared to Dropbox.

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.

Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment